Embarq born tonight

At the stroke of midnight, Sprint will once again be two separate companies. Unlike the release of its PCS tracking stock last decade, though, Sprint is keeping its long-distance and wireless assets together and spinning off its local business instead.

The new local access business Embarq is widely expected to be the poorer of the two businesses. Though Sprint is currently the largest independent local exchange provider in the U.S., but most analysts favor the Sprint Nextel’s high-growth wireless business as LECs continue to bleed access lines and lose customers to cable and wireless companies. In a research note on Tuesday, UBS Securities analyst John Hudolik said he expected Sprint to have the highest line lost rate of all U.S. LECs in 2006 at 7.8%, higher than Sprint’s own projections of a 5.5% to 7.5% loss this year. Embarq has also said it expects revenues to be flat or fall in its first year of operation.

Still, Embarq will wind up being one of the larger telecom carriers in the U.S. It is expected to emerge tomorrow with a market capitalization of more than $6 billion, revenues of more than $6.4 billion and operating profits just short of $1.5 billion. And starting tomorrow, it will join the ranks of the S&P 500, Standard & Poor’s list of powerhouses driving the U.S. economy.

Independent telecom analyst Jeff Kagan said it would be unwise to discount Embarq just because it’s severing ties with high-growth Sprint. Kagan pointed to the appointment of AT&T Wireless veteran Dan Hesse as CEO of the new company--a very aggressive move that shows Embarq won’t just lie down.

“Hesse is changing the company into a competitor offering not just telephone, but DSL, wireless and television,” Kagan said. “It sounds like the same idea we are seeing from the larger Bells as they prepare to compete with the cable television industry.”

In fact, because of Sprint’s partnership with many of the country’s top cable providers, Embarq might just wind up competing with its parent, Kagan said. Sprint plans to offer converged voice and data services with the cable companies, going after the same customers as Embarq where the wireline carrier holds franchises.