Verizon Hawaii, Carlyle deal OK'd
By Sean Hao
Advertiser Staff Writer
The Hawai'i Public Utilities Commission yesterday approved the sale of Verizon Hawaii, removing the final hurdle to the $1.65 billion acquisition of the state's major telephone company.
The 2-1 decision gives Washington, D.C.-investment firm The Carlyle Group permission to proceed with the deal that's expected to net Verizon Communications Inc. more than $850 million, while tripling the debt of the local phone company from $427 million to $1.39 billion.
However, the commission put numerous conditions on the sale to ensure consumers benefit despite the risks of creating a phone company loaded with debt. Those conditions include requiring Carlyle to infuse additional equity into the sale to lower the phone company's debt-to-equity ratio to 76.3 percent from a proposed 82.5 percent.
Officials for Carlyle and Verizon Hawaii late yesterday said they were still reviewing the PUC's 97-page order and would not speculate on what their next steps might be.
Carlyle has about 10 days to appeal the commission's ruling.
"They have the opportunity to ask the commission if they choose so for reconsideration or clarification," said Kris Nakagawa, chief legal counsel for the PUC.
Carlyle contends the sale will return management of the phone company to Hawai'i while boosting local employment and customer service.
However, the state consumer advocate and others have expressed concerns that the large debt load of Hawaiian Telcom, the proposed name of the new company, could increase the risk that the company could run into trouble if its financial targets were not met. A foreclosure by lenders under such a scenario could affect customer service and rates along with the jobs of employees, they said.
"Overall, I find the potential risks and the potential benefits in the record ... indicate that the proposed transfer of control is not in the public interest," PUC Commissioner Wayne Kimura wrote in voting against the sale.
Commission Chairman Carlito Caliboso and Commissioner Janet Kawelo voted for the deal.
Transition time
The proposed transaction between Verizon Communications and Carlyle includes Verizon Hawaii's local telephone operations and print directory, long-distance and Internet service provider businesses, but excludes Verizon Wireless. If Carlyle proceeds, the deal could close in about a month followed by a nine-month transition as Verizon Hawaii's operations are turned over to Hawaiian Telcom.
The Hawai'i PUC's approval of the deal follows recent cases in Arizona and Oregon where regulators rejected leveraged buyouts of utilities out of concerns the risks would not benefit consumers.
Though details differ between the situations in Hawai'i, Arizona and Oregon, some key similarities remain. All three deals include the purchase of an integral public service company by a private investment group that would create a company with high debt. At the same time investors involved promise benefits for consumers and relatively large returns for investors.
Unlike the situations in Arizona and Oregon, there has been no coordinated public opposition to Carlyle's plans despite concerns that high debt will leave the company with less flexibility. Those concerns did lead the state consumer advocate to request that conditions be imposed on the deal and those and other restrictions were included in the PUC's order yesterday.
Among those conditions, John Cole, executive director for the state Division of Consumer Advocacy, recommends Verizon give customers a $20.70 credit on their bills. According to an analysis by Cole, the risks mean the deal may not be in the public's interest without the credit, a rate hike moratorium and other provisions.
That's because under Carlyle's original plan, Hawaiian Telcom's debt-to-equity ratio would have risen from 55 percent in 2004 to 82.5 percent at the closing of the deal and 85.3 percent by year's end. That would leave Hawaiian Telcom with about $50 million in financial reserves, meaning that higher-than-anticipated costs or lower-than-expected revenues could result in the liquidation of parts of the business, Cole wrote in a statement submitted to the PUC late last year.
And given Carlyle's practice of buying and selling companies, Hawaiian Telcom could be stuck with a lot of debt long after Carlyle leaves Hawai'i, Cole added.
Officials for Carlyle have said Cole's analysis was overly pessimistic.
In addition to requiring Carlyle to increase the amount of equity involved in the sale, the commission also ordered that any Hawaiian Telcom dividends go toward debt repayment until the phone company's overall debt-to-equity ratio is reduced to 65 percent. Hawaiian Telcom also would be prevented from selling its print phone directory business without PUC approval.
Credit ratings watch
Meanwhile, the prospects for increased debt at Verizon Hawaii have landed it on a credit ratings watch. Last year, Fitch Ratings downgraded Verizon Hawaii's senior unsecured debt and first mortgage bonds. If the deal goes through, further downgrades would reduce the company's credit rating from investment grade to "junk," which would significantly raise borrowing costs.
Verizon Hawaii competitor Pacific LightNet Communications opposes the sale because it will increase Verizon Hawaii's debt, postpone needed network upgrades and could hurt competition and customer service.
"Those are the big concerns," said Pat Bustamante, president for Pacific LightNet. "I really don't see it being a benefit."
Reach Sean Hao at 525-8093 or shao@honoluluadvertiser.com.
