Verizon access line sale short on options

If Verizon Communications intends to shed a substantial number of its access lines, as it indicated in its third quarter earnings call last month, the carrier's options may be limited.

Larry Babbio, vice chairman and president of Verizon, said during the call that the company is looking to generate cash that can be used to fund further expansion of fiber-to-the premises deployments. Among the options: Selling off non-strategic and sub-performing access lines, selling whole states' access lines or selling access lines adjacent to aggressive rural LECs wanting to expand.

“It's clearly not our intention to say we're going to divest a third, but at 55 million [lines], would we be better off at 45 million or 40 million and take the money generated for those?” he asked. “We're still working at this and we want to hold all of our options open.”

A fourth, and possibly more viable, option would be to create a spinoff entity to operate exchanges that otherwise would be sold. That option was apparent after Verizon canceled a previous sale of access lines in upstate New York.

Verizon CEO Ivan Seidenberg, during a press conference at the Executives Club of Chicago, said the company would be open to a spinoff, but didn't commit.

“New York itself was difficult because we think it was too many lines for the market to swallow. We wanted to test the market,” he said. “Our goal is we want to make sure, however we restructure, that both entities are successful.”

The market for selling large groups of access lines has virtually disappeared over the past year. SBC Communications also pulled a sale of lines in Michigan and Texas. The problem is lack of buyers and falling valuations due to competition and regulatory uncertainty, said Bill King, president and managing partner of JSI Capital.

“I like this whole theory of creating a spinoff,” he said. “It's almost like the old structural separation argument.”

If Verizon were to create a separate entity for 15 million rural access lines, King said, the carrier feasibly could also unload $15 billion in debt and have the spinoff seek a wireless MVNO or broadband business model to differentiate itself.