Verizon's Idearc Spinoff Called a Put-Up Job
DALLAS (CN) - Verizon made $9.5 billion from spinning off its now-bankrupt telephone book subsidiary, Idearc, after "stripping Idearc of cash and burdening Idearc with massive debt," the U.S. National Bank Association claims in Federal Court. "Verizon effectively removed approximately $9.5 billion from Idearc without providing Idearc with reasonably equivalent value in exchange," the complaint states. "Verizon cast Idearc adrift, burdened with an anchor of debt around its neck, insolvent and without adequate resources to survive."
The Bank Association, litigation trustee for Idearc, says the deal was Verizon's effort to get out of the telephone directory business, and included transferring $2.5 billion in cash from Idearc to another Verizon subsidiary, and forcing Idearc to assume some $9 billion in Verizon debt. "Not surprisingly, after limping along for a period of time, Idearc went bankrupt," the complaint states.
"Sometime prior to November of 2006, Verizon devised a scheme under which it would obtain approximately $9.5 billion - not in the marketplace, but through the use of lawyers and Wall Street investment bankers," according to the complaint. "At that time, a declining part of Verizon's business was its yellow pages telephone directory business. Verizon had generated substantial revenues from its print directory business in the past, but by 2006 that business segment's revenues had been steadily declining (for example, revenue dropped by $169 million between 2005 and 2006 alone). This was due, among other reasons, to the public's declining use of paper telephone directories and increased use of alternative information sources, such as the internet. Although Verizon had started its own on-line directory website, the revenue generated by that portion of Verizon's business was extremely small compared to the revenue generated by Verizon's print directory business. In 2006, the revenue from the internet business was only approximately $230 million compared to approximately $2.978 billion for the print directory business. Moreover, Verizon faced stiff competition in the internet directory business from numerous other companies. At that time, the historical print directory business was in decline and the viability of internet directory services was yet to be determined. Successful conversion from print to internet was far from assured. This made it very doubtful that Verizon would be able to offset the continuing decline in its print directory revenues with increases in revenues from internet based business. Faced with this unfavorable business situation, Verizon embarked on a plan to turn lemons into lemonade.
"Verizon determined that it could obtain approximately $9.5 billion by undertaking a complicated "spin-off" transaction through which Verizon's print and on-line directory businesses would become a stand-alone company, Idearc, Inc. ("Idearc"). Prior to the spin-off, Idearc was a Verizon subsidiary. Verizon would reap this windfall to the injury of Idearc and Idearc's creditors by stripping Idearc of cash and burdening Idearc with massive debt. On or about November 17, 2006, Verizon spun-off Idearc as a stand-alone company (the "Spin-off"). In the process, Verizon caused Idearc to (a) transfer almost $2.5 billion in cash to Verizon's wholly owned subsidiary, VFS and (b) incur approximately $9 billion of debt, the proceeds of which were either given to Verizon to retain or used to pay off Verizon's outstanding debt. Immediately after the Spin-off, Idearc's balance sheet reflected that its debts exceeded its assets by approximately $9 billion. Not surprisingly, after limping along for a period of time, Idearc went bankrupt."
Idearc emerged from bankruptcy in January under the name SuperMedia. With its reorganization, it reduced its debt from $9 billion to $2.75 billion, according to published reports.
In a written statement, Verizon Executive Vice President and General Counsel Randall Milch said the "lawsuit is baseless and without merit."
He added that Idearc was "appropriately valued at the time of the spinoff.
"Verizon bears no responsibility for Idearc's bankruptcy almost three years later," Milch said in his statement.
The U.S. Bank National Association seeks reimbursement of the entire amount Verizon took from Idearc, plus interest and "unlawful dividends."
Its lead counsel is Patrick Keating with Haynes and Boone.