What now on the Verizon sale?

More than a year and two months after Verizon owner Micronesia Telecommunications Corp. and prospective purchaser Pacific Telecom Inc. jointly filed with the Commonwealth Telecommunications Commission an application for the transfer of all common stock, the proposed multi-million dollar deal still awaits final determination.

The antagonists to the initial Sept. 5, 2003 application, Gov. Juan N. Babauta and CNMI consumer counsel Brian Caldwell, have gone a long way in opposing the proposed sale, asking the CTC to strip Verizon of ownership of the only fiber optic cable network in the CNMI.

Besides the audit being conducted to determine PTI’s financial capability to keep Verizon running in the coming years, the divestiture request remains the only issue to be addressed in the proposed telecom purchase.

What would happen regardless of how the CTC would rule on the divestiture issue remains a question.

For PTI executive vice president for business development Jose Ricardo P.R. Delgado, he said he is confident that the CTC would rule in his company’s favor.

“I think that by next week, CTC will have all the information it needs to come up with a decision,” Delgado said via telephone from Manila. If PTI finally takes over Verizon’s operations, it will be the first Filipino-owned investment in the United States’ telecommunications industry.

Once the CTC hands down a favorable decision, Delgado said he is optimistic that the telecom deal could be consummated within two months.

He vowed to eventually infuse additional investments to improve Verizon’s mobile and landline phones and DSL services.

“I see the economy growing in the coming years,” Delgado said. At this stage, he said he has been talking to some Philippine companies for possible call center investments in the future.

“I hope they [CTC board] decide and get this [transaction] going,” Delgado said. “We can work with all branches of government to render excellent service in the CNMI. Hopefully, before Christmas, we’ll know [CTC’s decision].”

Delgado, however, would not disclose PTI’s plans if the CTC decides adversely on the divestiture issue, including the possibility of backing out from its proposed investment. “I’m of the opinion that that’s not going to happen.”

Govt discusses possibilities

Assistant attorney general Caldwell indicated that the government would conditionally consent to the consummation of the telecom deal if the CTC grants the divestiture request and such process proceeds with or without any party purchasing shares to co-own the fiber optic cable.

First, Caldwell said the audit report on PTI’s financial capability should come out favorably for the company. If PTI continues to abide by all its other commitments and no other issues arise, Caldwell said the government would finally consent to the telecom purchase.

After all, there is the possibility that the government would purchase shares to co-own the fiber optic cable if the CTC rules to strip Verizon of part-ownership of the cable.

“We haven’t gotten to that point yet so we don’t know. We think the CNMI would take a good hard look at the possibility, since the CNMI is potentially one of the largest users. This could ultimately reduce government expenditures and save taxpayer’s money,” Caldwell said.

“Also, other governments have found that it is in the public interest to own a share of telecommunications infrastructure. For example, we understand that Hawaii owns shares in fiber optic cables connecting its islands,” he added.

Caldwell said the CNMI has been pursuing grants from the U.S. Department of Homeland Security for this purpose.

On July 28, the governor formed an inter-agency group known as the CNMI’s First Responder Task Force, vowing to break what he insists is Verizon’s monopoly in the Commonwealth.

Saying that telecommunications monopoly undermines the CNMI’s security, the governor said that consulting firm SPAWAR had assigned a consultant to help the Commonwealth pursue short- and long-term Homeland Security grants, which could range from $5 million to $8 million.

“The monopoly undermines our security,” the governor said. “We must diversify our telecommunications choices, so that we will have more options during emergencies. That is why I will not allow this monopoly to continue.”

While Caldwell believes that it is premature yet to speculate if private companies would be interested to co-own the cable, he said the government believes that each company that currently leases private line service from Verizon would look at their capacity needs and at least investigate the possibility of investing.

Firm to study cable stake

Choice Radio Inc., the company that operates i-Connect, remains neutral on the pendency of PTI and MTC’s application for sale approval at the CTC. However, i-Connect would look at the possibility of purchasing shares to co-own the cable if the CTC would grant the governor’s divestiture request, according to its general manager, Manny Andaya.

“If it’s something that’s reasonably priced, if we can afford it,” Andaya said.

Andaya said i-Connect would have to first conduct a cost-benefit analysis on the possibility of purchasing cable shares.

I-Connect’s provides two-way radio and cellular phone services. Since 2002, the company has been paying monthly fees for Verizon’s cable services.

“We’re fine with the arrangement right now,” Andaya said. He added that, while he could not say whether or not current cable rates are exorbitant, i-Connect has maintained the profitability of its business operations. “It’s [collecting fees] just right because they [Verizon] own it [cable].”

If PTI backs out?

Caldwell said other investors could bid to purchase Verizon if PTI backs out, should divestiture of the cable ownership proceed.

“Other parties have shown an interest in investing in this asset. We would have to wait to see which new company bids,” he said. “Several companies may be interested. We understand that Verizon has met with several [prospective buyers].”

Delgado did not indicate PTI’s plans when asked if his company would back out from the sale should the cable divestiture proceed. He did not indicate if he would challenge such a CTC decision, stressing his confidence that the commission would decide favorably for PTI.

“I think that they’ve acted with a lot of integrity, and one of the reasons why I’m still here is because I actually believe that these guys want to do the right thing,” said Delgado.

If the CTC decides against the government’s divestiture request, there is a possibility that the issue could be challenged before judicial courts.

“The parties specifically reserve that right, regardless of which way the commission decides on this. If this occurs, we will have to discuss it with our clients and they will have to decide how they want to proceed,” Caldwell said.

The FCC ruling

On Nov. 6, 2003, the Federal Communications Commission granted the application for transfer of control over Verizon’s operations to PTI, a direct, wholly owned subsidiary of Prospector Investment Holdings Inc., a registered corporation in the Cayman Islands.

While the holding company’s owners, father-and-son Ricardo and Jose Ricardo P.R. Delgado, are both Filipino citizens, the FCC noted that both the United Kingdom and the Philippines are both members of the World Trade Organization.

The FCC ruled that PTI is financially and technically qualified to continue with the operations of Verizon in the CNMI. The FCC said that the Delgados’ expertise gained from operating ISLACOM—a telecommunications firm in the Philippines—is sufficient to demonstrate that PTI could maintain Verizon’s operations, noting that ISLACOM had 10 times more than the assets of MTC.

This ruling effectively rejected the governor’s opposition to the transaction, who earlier said that ISLACOM was a “miserable failure” in the Philippines.

“For telecommunications service providers, the Commission has determined that the relevant product and geographic markets can include both U.S. domestic telecommunications service markets and telecommunications services between the U.S. and foreign points. We determine that the proposed transfer will not likely result in harm to competition in any relevant market and will likely yield tangible public interest benefits,” the FCC said.

The FCC cited PTI’s plan to provide expanded and innovative telecommunications services to local consumers and to invest in equipment and infrastructure.

Specifically, the commission noted PTI’s plans to:

* introduce third generation wireless services;

* increase the capacity and coverage of wireless services;

* rollout broadband services on a mass market basis;

* increase broadband capacity to support such services as video on demand;

* compete with Guam as a regional hub by investing in fiber optic capacity from the continental U.S.

“The Department of Justice and the FBI now advise that the Executive agencies involved here have no objection to a grant of the transfer applications, provided that the Commission conditions the grant on compliance with the terms of a network security agreement between the DOJ, FBI, Department of Defense and Department of Homeland Security, and PTI and MTC,” the FCC ruling stated.

The settlement agreement

Despite the FCC’s ruling in favor of the Verizon deal, the governor continued to oppose the transaction before the CTC.

On March 12, 2004, the CTC recognized the governor and the CNMI consumer counsel as intervenors in the pending application by PTI and MTC.

The governor insisted that he wanted to protect the public interest, saying that he would only consent to the consummation of the Verizon deal if his concerns were addressed.

A turning point in the longstanding dispute on the Verizon deal, however, came about when the applicants and the intervenors reached a 27-point settlement in early May before settlement hearing officer Sean Emory Frink. The government describes this development as a product of its effort to protect the public interest.

PTI agreed to invest a minimum of $20 million in capital expenditures during the five-year period immediately following the closing of the telecom deal. As part of the settlement, PTI also assured that there would be no local rate hike for two years from the transaction’s closing and that a trust fund would be established for the benefit of all Verizon employees. It also agreed to retain all existing Verizon employees in their respective positions.

In a nine-page Final Agreed Negotiation Report submitted to the CTC, the parties also agreed on several issues, including an end to inter-island long distance charges to Tinian and Rota and the retention of all Verizon employees.

Frink reported that the parties agreed on the proposed stock purchase from MTC, with the contingency that a final audit of the transaction and several issues that remain to be resolved be decided by the CTC board.

The parties also agreed that no toll would be charged for inter- and intra-island calls, including all phone calls and phones to ISP services. The parties agreed on the separation of wholesale and retail portion of Verizon’s marketing operations and on the submission of an annual audit of financial statements to the CTC.

PTI also vowed to join the National Exchange Carrier Association as soon as possible upon closing the agreement. Its membership to NECA will provide assistance to rate and tariff development, industry database management, compliance auditing, economic forecasting, trend analysis, and regulatory policy analysis.

The dispute continues

The settlement, however, did not end the opposition to the sale. There remained at least three issues to be resolved: the government’s proposal for the imposition of a performance bond on PTI, an audit of PTI’s financial capability, and Verizon’s monopoly of the fiber optic cable.

On May 4, the governor’s lawyer, assistant attorney general James Livingstone, and Caldwell, asked the CTC for the establishment of special enforcement procedures that would require PTI to post a $10-million bond to ensure that the company will not violate the agreed settlement.

The government’s proposal outlined enforcement provisions providing for a minimum penalty of $10,000 against PTI if it violates the settlement.

On June 17, however, the CTC’s three-man board unanimously rejected the proposal for special enforcement provisions and the $10-million bond. CTC chair Norman Tenorio, commissioners Mike Fitzgerald and Josephine Mesta unanimously voted to reject the proposal, with the chair saying that the imposition of the bond would just add to the cost of doing business, which would impact the consumers.

Tenorio said more faith should be placed on the CTC in its task to oversee PTI’s operations, once its acquisition of the telecom company is consummated. He said PTI should be allowed to operate its affairs on a free enterprise setting.

The CTC ruling narrowed the dispute to two remaining issues: the financial audit and the monopoly.

Divesting cable ownership

On Sept. 21, the government asked the CTC to divest Verizon of 100-percent ownership of the CNMI’s only submarine interisland cable network. The governor and Caldwell contended that the monopoly has resulted in higher telecommunication costs in the CNMI.

Caldwell and Livingstone proposed that all the assets of the submarine network, including the submerged and terrestial fiber optic cable, be placed in a trust during the closing of the transaction between MTC and PTI.

They asked that the CTC appoint a trustee, who should hold a public auction for ownership interests in the trust within 90 days. The government proposed that the possible bidding be held open for one week.

Under the proposal, the trustee will have the power to sell the assets or ownership interest of the trust, up to 33 percent of the total capacity currently available on the interisland cable. No party or combination of parties may acquire more than 33 percent of the total ownership interests or assets of the trust. Unsold portions of the trust will devolve back to Verizon’s ownership.

The government contended that the MTC has already recovered a substantial portion of its investment for the cable network. Yet MTC charges high rates to telecom companies that would lease a certain capacity from the cable network to provide services, the government said.

To illustrate its point, the government said the MTC charges $7,143 per month to lease a T1 line between the CNMI and Guam, over 10 times more expensive than the price to lease the same capacity between Guam and Hawaii.

The government believes that divestiture will lead to investment opportunities, such as the establishment of server farms, data storage, and call centers.

PTI and MTC strongly opposed the divestiture request, saying that such an action, if granted by the CTC, would result in “an unprecedented demonstration of government overregulation and interference with private enterprise.”

The companies said there is no statutory and regulatory basis to divest Verizon of total cable ownership, on which MTC’s wholly-owned subsidiary, GTE Pacifica, has invested some $14-16 million seven years ago.

The companies debunked the government’s rate comparison of leased lines between Saipan and Guam and between Guam and Hawaii or Los Angeles, saying that such comparison did not consider the significant difference in the different markets’ customer base. They said several transpacific telecommunications providers have placed their marine cable operations through Guam, making the territory a telecom hub within Asia and between the United States.

PTI and MTC also projected that divesting Verizon of total cable ownership would adversely impact the company’s ability to invest significantly on capital improvement in the future, after PTI agreed to fund capital improvements with some $20 million over the next five years.

As of yesterday, there is no word yet if the audit being conducted by Delloiite and Touche has already been completed. The answers to the big question mark on what lies ahead of the proposed Verizon transaction, which has been awaiting the audit report and the ruling on the divestiture request, lies with the CTC, the board members of which would meet on Tuesday next week.