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Embarq (NYSE: EQ), a rural local exchange carrier in Overland Park, Kansas, recently kicked off an auction for its logistics business, a source with knowledge of the situation. told mergermarket.
In an interview, Embarq CEO Tom Gerke said Embarq has some non-core assets it could sell and in the future, could divest its mobile virtual network operator (MVNO), an asset the company is “winding down.”
The Wall Street Journal last week reported that Embarq retained JPMorgan Chase to explore a sale of the company but potential buyers, such as Windstream in Little Rock, Arkansas, could not secure credit to cover Embarq’s USD 5.9bn valuation due to Wall Street turmoil.
The source, who is not associated with Embarq, claimed the logistics business was “non-core, not profitable” and “a distraction” to management. Embarq itself is the unit’s largest customer. The logistics segment recorded an operating loss of USD 2m on revenue of USD 466m in 2007, an operating loss of USD 16m on revenue of USD 530m in 2006 and an operating loss of 41m on revenue of USD 563m in 2005.
Michael Gary Nelson, an analyst at the Stanford Group, said if Embarq divested logistics, the company’s margins, considered low, would fall in line with other rural phone operators. He speculated that Embarq began an auction for logistics at the same time as it launched a sale of the whole company. Potential Embarq buyers, like competitor Windstream, would rather purchase the company without the unit, Nelson said.
Another analyst said Embarq’s logistics business is a value added reseller (VAR) of telecom parts. Since telecom providers purchase equipment, carriers might resell hardware (telephones, handsets, accessories, etc.) to its own customers. They also resell to other providers, usually small and middle-market players.
Brightpoint in Indiana is the largest independent VAR, but it competes against big telecoms like AT&T in Texas and Verizon in New York, which puts pressure on its margins. The analyst said Brightpoint could purchase Embarq’s logistics business if it isn’t too large to digest.
He speculated the unit is worth one-third to half of its sales. A banker estimated that Embarq could, perhaps, fetch as much as 1x sales in a logistics divestment depending on what kind of contract Embarq establishes with the potential buyer.
Meanwhile, Gerke said the company’s MVNO, a pre-paid wireless phone service offered in conjunction with Sprint Nextel, was losing money like others in the sector, and so, Embarq “looked at a variety of options” for it. MVNOs have struggled under pricing pressure from large, wireless phone providers, and many have gone bankrupt. In Embarq’s last annual report, the company said, “Our wireless service has been and continues to be dilutive to our results of operations, but we have and continue to take the actions necessary to improve these results... and will further evaluate our wireless service offerings.”
Embarq has said that it is not trying to build business and is letting it “dwindle down,” a third analyst said. This division also provides only “pocket change” for Embarq and potential buyers, the analyst added, noting that ESPN and Disney both tried to enter the market but ended up shutting down their divisions.
Virgin Mobile still is a player in the MVNO space. The company recently acquired Helio from SK Telecom and Earthlink for USD 39m in Virgin Mobile USA stock.
Embarq’s wireless segment generated sales of USD 51m in 2007, up from USD 7m in 2006 when the company entered into its agreement with Sprint. Gerke said for now, Embarq intends to service existing MVNO customers “but we always have the potential to divest it.”
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