Investors get glimpse of likely Embarq trading

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Shares in Embarq, the US telecommunications company that will be formed when Sprint Nextel spins off its local phone operations this month, began trading on a “when-issued” basis on the New York Stock Exchange on Thursday.

The stock, which opened at $51 a share, is expected to begin full trading on May 18, the day after Sprint Nextel, the third-largest US mobile carrier, is due to complete the spin-off and receive senior notes totalling $4.49bn in Embarq.

On Thursday shareholders were given their first detailed look at the financial structure and likely performance of the new local phone company in filings with the US Securities and Exchange Commission. Embarq said it expected to report operating income of between $1.45bn and $1.55bn this year, on net operating revenues of between $6.4bn and $6.5bn, but cited a number of factors that could influence its performance.

Sprint Nextel, formed last year when Sprint acquired Nextel Communications, is spinning off the local business to focus on its faster-growing wireless operations and providing long-distance services for big companies.

Like other local phone operations, the Sprint Nextel unit generates significant cash, but is losing local access line customers as they defect to wireless, cable telephony and VoIP rivals.

In the filings, Embarq noted that “continued competition from wireless providers and increasing competition from cable providers are expected to drive an increased level of access line losses in 2006”.

It said it expected to record access line losses of between 5.5 per cent and 7.5 per cent this year – in line with estimates from the other big US telecommunications groups. The local unit had 7.26m access lines in service at the end of the first quarter.

However, it expected to continue to partly offset these losses with the previously announced launch of an Embarq-branded mobile virtual network operator wireless service and strong growth in its DSL broadband access service. In the first quarter, the local unit added 84,000 DSL customers to end with a total of 777,000 connections.

This year it expects DSL subscriber numbers to grow by about 40 per cent although it notes that the increase in data revenues will be partly offset by customer acquisition and installation costs.

In the light of these factors, Embarq says it expects net operating revenues to decline from a pro-forma $6.7bn last year and operating income to fall from $1.76bn.

As an independent company, Embarq will rank as the largest “pure-play” provider of local phone services in rural America, ahead of CenturyTel and Citizens Communications, and will have 20,000 employees. Within a few months Alltel also plans to spin out its local-phone business, ranking it as number two behind Embarq.

While competition in the local phone business remains fierce, Embarq may be somewhat shielded by its focus on second-tier and rural markets. Senior executives have also indicated that the new company plans to pursue acquisitions more aggressively once the separation is complete. Most of the big telecommunications groups are seeking to sell off some of their access lines and smaller rural carriers might also be acquisition targets.

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