It seems that another phone company has grown tired of consumers' waning interest in letting their fingers do the walking. Verizon (NYSE:VZ) has been looking to offload its stodgy Yellow Pages business. On Friday, it took care of the necessary SEC registration to spin off its telephone directory and related Web business.
The decision isn't final, however -- Verizon is still weighing whether to sell the business outright or spin it off directly to shareholders. Whatever the final decision, management stated that it plans to take care of the transaction by year's end. Selling the business would clearly bring in the most cash, giving the company further funds to invest in the faster-growing Verizon Wireless mobile-phone unit or to upgrade its traditional POTS, or "plain old telephone service," to the more futuristic fiber-optic lines capable of piping phone, Internet, and cable services directly into a home. The downside is that a cash sale would be taxable. As a case in point, Verizon sold its Canadian directory business to Bain Capital for $1.6 billion in 1994, but netted only $516 million after taxes.
On the other hand, a spinoff is expected to be tax-free, and would allow Verizon to unload a chunk of its hefty debt load to the new entity. This type of move would also free up capital for the growth avenues we've already discussed -- including a potential buyout of Vodafone's (NYSE:VOD) sizeable ownership of Verizon Wireless.
But why get rid of the directory business in the first place? It appears that Verizon does not consider the cash flow that the directory business throws off to be crucial to its operating strategy. Sure, the profit margins are estimated at nearly 50%, but the business unit accounts for only about 5% of Verizon's total sales, and it's a drag on overall growth. The directory business has lost its appeal in recent years, too, as consumers have increasingly given up flipping through the cumbersome book in favor of finding the same information for free on Yahoo! or Google. From a personal standpoint, I never cared much for the side effect of newsprint-stained fingers, either.
Verizon's directory-service business provides sales, publishing, and related services, mostly through the well-known Yellow and White Pages, but also online through SuperPages.com. There are five main players in the space, including AT&T (NYSE:T), BellSouth (NYSE:BLS), R.H. Donnelly (NYSE:RHD), Dex Media (NYSE:DEX), and Yellow Book USA. Verizon's move will not be overly strategic to its $80 billion in annual sales, but it does signal that the company is serious in committing to wireless and fiber-optic services as its two primary growth avenues.
Growth has been hard to come by in recent years for the children of Ma Bell, which include Verizon, AT&T, BellSouth, and stepchild Qwest (NYSE:Q). Even without the directory business, Verizon has more anemic growth than it can handle as it tries to figure out how to revitalize its traditional wireline telephone services. It's hard to say whether significant levels of growth will return to the larger telephone companies, but a dividend yield of nearly 5% in Verizon's case is a nice way of getting paid to wait to see whether conditions actually end up improving.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to further discuss any companies mentioned here. The Motley Fool has an ironclad disclosure policy.
