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The Honolulu Advertiser


BY Rick Daysog
Advertiser Staff Writer

Posted on: Wednesday, July 1, 2009

Hearing on telecom bid today

 • Sandwich Isles keeps finances private

Bidder: Sandwich Isles Communications Inc.

Parent company: Waimana Enterprises

Founded: 1995

CEO: Retired admiral Robert Kihune

President: Albert Hee

Employees: About 100

Phone lines: 2,022

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Sandwich Isles Communications Inc. faces a critical juncture today in its $400 million plan to acquire Hawaiian Telcom Inc.

The upstart phone company announced last month that it wants to buy the state's largest and oldest telephone company, in a competing offer to Hawaiian Telcom's standalone $460 million reorganization plan.

U.S. Bankruptcy Judge Lloyd King will hold a hearing today over whether Hawaiian Telcom should open up the sales process to outside bidders like Sandwich Isles or whether Hawaiian Telcom is free to proceed with its own deal on an exclusive basis.

Industry experts said Sandwich Isles faces long odds even if it obtains a favorable ruling: It's too small, lacks the expertise and won't be able to obtain the financing for its plan, they said.

With just 100 employees and slightly more than 2,000 customers, Sandwich Isles would experience considerable challenges acquiring a company that employs more than 1,400 and provides service to more than 500,000 residential and business customers statewide.

"That's a mom-and-pop operation that's trying to take over a local phone company," said Mark Lutkowitz, co-founder of Telecom Pragmatics Inc., a Nashville, Tenn.-based consulting firm.

"I don't think this is going to happen."

The 126-year-old Hawaiian Telcom filed for bankruptcy protection Dec. 1 due to mounting debts and the loss of thousands of customers to wireless and other competitors.

Founded in 1995, Sandwich Isles provides heavily subsidized phone lines to rural customers living on property developed by the Department of Hawaiian Home Lands.

The federal government pays Sandwich Isles about $13,000 per customer for providing the service, which is 100 times higher than the average subsidy for rural telephone service on the Mainland.

During an interview at the company's Downtown headquarters last week, Albert Hee, Sandwich Isles' founder and president, dismissed criticism of his company's size and capabilities.

The 54-year-old Annapolis graduate said Sandwich Isles has invested more than $334 million in fiber optic cables, switching equipment and other technologies over the past 14 years.

The company now has a statewide telecommunication network that covers more than 200,000 acres on six islands and has the 20-year exclusive rights for a 274-mile undersea cable that links O'ahu and the Neighbor Islands.

"I believe that Sandwich Isles' proposal is the only currently available proposal that will work for Hawai'i," Hee said in a recent court filing. "Sandwich Isles ... has never experienced the kind of outcry of complaints about service that are routinely reported in the press about debtors."

Jade Danner, CEO of Hawaiian Homestead Technology Inc., said Sandwich Isles has made a big difference in her company's growth.

Danner's company converts paper documents to digital files for the U.S. Department of Defense and other clients.

She said Sandwich Isles' fiber optic cables — which offer more bandwidth than transmission lines used by Hawaiian Telcom and Oceanic Time Warner — allow her company to move large amounts of data among several offices at about half the price charged by Sandwich Isles' competitors.

"These are all the rural, remote, far-flung places," said Danner, whose company mostly operates on Hawaiian homestead lands. "I think they're going to revolutionize what's possible in the work world."

There are plenty of critics.

Since 1995, Sandwich Isles has received more than $400 million in low-cost loans from the federal government to fund its rural telecommunications systems.

U.S. Rep. Henry Waxman, D-Calif., recently questioned the costly federal subsidies to Sandwich Isles and other local carriers such as Sprint Nextel and Mobi PCS, in hearings before Congress.

"We should ensure that recipients of these public funds meet certain obligations that benefit the consumers," said Waxman, chairman of the House Committee on Energy and Commerce, in a March 12 subcommittee hearing.

Lutkowitz, the telecommunications consultant, doubts that Sandwich Isles will be successful in obtaining the necessary financing.

To get the federal government to fund its purchase of the local phone company, Sandwich Isles must first get approval from the Federal Communications Commission to expand its existing rural service area to the entire Neighbor Islands, which is unlikely, he said.

Lukowitz added that the government has never allowed a company to use the rural subsidy program for a takeover of a local phone company.

"They can ask for it since they have nothing to lose but I just think it's a joke," he said.

Hee said he hopes to tap private lending sources for some of the financing.

Hee defended Sandwich Isles' use of government funding, adding that the company's per-line subsidy reflects the high cost of building a telecommunications infrastructure in Hawai'i.

According to Hee, the federal government has funded rural telecommunications programs for the past 70 years but his company was the first in Hawai'i to successfully take advantage of it.

"I think a lot of it has created a lot of opposition but, hey, if somebody knows how to do it better, let me know," Hee said. "You have to have a little bit of maverick in you to do what I have done."