Verizon's Idearc Spinoff Looks Good For Shareholders

Includes: IDARQ, VZ
by: Brian Harper, CFA

The Verizon Spin looks potentially interesting. The company is spinning off its yellow pages directories business, on the expected date of November 17th. We've got the following things working in our advantage:

1) Verizon shareholders get one share of Idearc (IAR) for every 20 shares of Verizon. So they aren't likely to do much besides sell it.

2) Verizon is loading it up with debt. IAR will get $9.1 billion, which is nearly 22% of Verizon's debt load. In 2005 the division was 4% of revenue and 5.7% of operating cash flow. The debt will push down the equity value, but could amplify the upside.

3) First half results were pretty lousy for the division. I'm not sure if there were separation costs that hurt the operating results, but operating income was down around 18% on a 6% revenue decline. So costs have hurt them this year.

As with any spin, cost cuts are a strong possibility. The directories business is going to continue to decline, but it throws off huge, stable cash flow. I estimate free cash flow will be around $3.25-$3.50 a share.

So should we see a bargain price (I'm thinking below $35-40), this stock could have wheels.

Disclosure: I presently own Verizon shares.