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Verizon Unit Was Insolvent by $1 Billion, Witness Says

Verizon Communications Inc.’s directory business was insolvent by more than $1 billion at its 2006 spinoff, facing worse prospects than were disclosed to investors, a witness testified in a trial over the transaction.

The yellow-pages business was sold off with more than $9 billion in debt and $400 million in retiree obligations, Carlyn Taylor, a senior managing director at FTI Consulting, said yesterday in federal court in Dallas. It was worth $8.15 billion at the time, she said.

“There was so much debt on it, it was not surviving a mild recession,” said Taylor, who testified on behalf of creditors of the directory business that are suing Verizon. “With the declining trends they were already experiencing, they couldn’t survive.”

Verizon is fighting a lawsuit brought by creditors of the directory unit, Idearc Inc., who claim the second-largest U.S. phone company loaded the business with debt and drove it into bankruptcy. The bankruptcy reorganization of Idearc, now named SuperMedia Inc., created a trust to bring lawsuits on behalf of creditors with claims totaling $6 billion.

The creditors’ lawyers seek to show that Verizon executives knew competition from the Internet and independent directory publishers spelled a dim future for the unit. That assessment was hidden from debt and equity investors, the creditors allege.

‘Turnaround Story’

Verizon executives instead floated a “turnaround story” that the company was undergoing a temporary earnings decline after the sales staff was cut back in 2003, they claim.

Verizon has called the complaint baseless. Philip Anker, a Verizon attorney, said at the trial yesterday that analysts’ negative views of the company’s growth prospects were known to the market and disregarded by investors in Idearc’s stock. The stock price indicated at least $4 billion of equity in the company in the year after the transaction, he said.

Taylor said New York-based Verizon didn’t disclose that the subsidiary was experiencing revenue drops of more than 10 percent in major markets, where customers were adopting broadband Internet service.

“There is no mention of double-digit declines,” Taylor said. “That was very, very material.”

Verizon’s consultant McKinsey & Co. forecast in March 2006 that the directory unit would shrink steadily. Verizon told ratings companies and lenders that by 2010 the business would be growing at 1.7 percent annually, according to documents presented by the plaintiffs at the trial.

“There is a lot of information and analysis in it that the company is going to shrink and not grow,” Taylor said about the McKinsey report, which she said wasn’t disclosed.

Steve Hartmann, a Verizon attorney, declined to comment on Taylor’s testimony.

The creditors’ lawsuit is U.S. Bank National Association v. Verizon Communications Inc., 10-01842, U.S. District Court, Northern District Texas (Dallas).

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