Verizon sale terms
reached

Dropping the price by $50 million
helps meet the conditions set
by state regulators

Nearly a month after getting conditional state approval for their deal, local telephone provider Verizon Hawaii and its buyer, the Carlyle Group, finally have a connection.

It wasn't easy, though, as parent company Verizon Communications Inc. and the private equity investment firm negotiated for weeks and into the final hour yesterday before a Public Utilities Commission deadline to request reconsideration of the requirements the agency imposed on the sale.

Hooking Up Verizon Hawaii and the Carlyle Group agreed yesterday to modify the terms of their deal so the sale meets conditions stipulated by the state Public Utilities Commission. Cost: Verizon Hawaii lowers its base purchase price to $1.6 billion from $1.65 billion. Cash: The Carlyle Group agrees to abide by the commission's terms that include raising the investment firm's cash stake in the deal to 23.7 percent of the purchase price from 17.5 percent. Carlyle also agreed to provide additional cash at closing. Closing: Transfer of control is expected in early May with the new company to be called Hawaiian Telcom. What's being sold: Verizon Hawaii's local-telephone business that includes 707,000 access lines, long-distance and Internet services, and Verizon's print directory business. Employees: 1,300 of Verizon Hawaii's 1,700-member work force are with the International Brotherhood of Electrical Workers Local 1357.

In the end, Verizon agreed to lower the base purchase price to $1.6 billion from $1.65 billion, and Carlyle agreed to comply with the terms of the commission's decision by providing Verizon with more cash. The deal is expected to close in early May, with the new company to be called Hawaiian Telcom.

"We're happy that there's some conclusion to the decision, and I think (union) members will benefit immediately with the returning of several human resources functions back to Hawaii," said Scot Long, business manager/financial secretary of the International Brotherhood of Electrical Workers Local 1357, which represents 1,300 of Verizon Hawaii's 1,700 employees.

"I think the consumers will benefit because of the immediacy and the local focus that will be done by the Carlyle Group and Hawaiian Telcom. I think they'll be able to respond to the needs of the consumers a lot quicker, versus being under the corporate umbrella of Verizon."

Verizon and the Carlyle Group, based in Washington, D.C., made the announcement yesterday in a joint two-paragraph news release. They did not disclose additional terms of the modified agreement and declined to comment outside of their statement. They previously had received two extensions from the PUC to continue discussions.

The pending change of ownership ends a nearly 11-month process that included public hearings, legislative resolutions and a divided 2-1 decision by the three-member PUC.

The commission, concerned with the amount of debt in the highly leveraged deal, placed several restrictions on the sale. One of the most notable was the stipulation that Carlyle increase its cash investment to 23.7 percent of the purchase price from the proposed 17.5 percent. The additional outlay generally was believed to run about $100 million before the new terms.

Another condition was that the new company not pay a dividend to investors until it lowers its debt to 65 percent of the purchase price from 76.3 percent. Also, Carlyle cannot sell or transfer the phone directory business without commission approval.

Kris Nakagawa, chief legal counsel for the commission, said the parties did not file any papers yesterday and he had not seen the terms of the new agreement.

"We'll have to determine whether or not they comply with the PUC order," he said. "There were numerous conditions imposed on them, and we'll have to take a look at the terms."

The Carlyle Group, which also will receive cash from local investors, will become the second owner in five years of the state's dominant phone company. In 2000, the company then known as GTE Hawaiian Tel turned into Verizon Hawaii when parent GTE Corp. merged with Bell Atlantic Corp. to form Verizon Communications.

Carlyle, which has more than $25 billion under management, is purchasing Verizon Hawaii's local telephone business that includes 707,000 access lines, long-distance and Internet services, and Verizon's print directory business. Verizon Wireless operations are not included in the sale, but Carlyle is planning a new local wireless division.

Verizon will keep two units in the state that provide services for federal government contracts -- Verizon Federal Network Systems and Verizon Federal Inc.

Also staying with Verizon Hawaii will be an approximately $271 million pension plan surplus that the electrical workers union had hoped would be transferred with the sale. The utilities commission earlier ruled that Verizon Hawaii could keep that money and use it to fund benefits for more than 1,300 former and retired Verizon Hawaii employees.

"We're disappointed with the pension, but we are excited with Carlyle's commitment to assume the collective-bargaining agreement and to help us grow our membership," said the union's Long.

He said Carlyle has anticipated that about 200 positions would be added to fill the payroll and back-office functions that had been farmed out to the mainland under the current ownership. The new jobs will be a mix of union and management positions.

As part of the commission's order, Hawaiian Telcom cannot apply for a rate increase until 2009 unless the commission finds there is a compelling need, and all Hawaiian Telcom customers will receive a one-time billing credit of up to $20.70 on the date of the deal's closing.