Spinoff Embarq outshines parent

When cellphone giants Sprint and Nextel merged in 2005, investors had a lot of hope for the combined company.

Few paid attention to Embarq, which was spun off from Sprint after the Nextel merger closed. Its core asset was in the dowdy — and dying — local phone business.

They're paying attention now.

Since being freed from Sprint s 15 months ago, Embarq eq has emerged as a top performer among U.S. telecommunications companies, easily surpassing its former parent.

"Embarq has been one of the best performing stocks in the group," says Frank Louthan, a telecom analyst with Raymond James.

Embarq shares have shot up 36% since it started trading as a separate company on May 4, 2006. Only AT&T, t up 55% in the same period, has done better, Louthan notes.

And Sprint, which was eager to shuck Embarq so it could focus on the jazzy new wireless world? Since marrying Nextel, the company has struggled with a host of merger-related problems. The pain shows in Sprint's share price — down 19% since the merger closed and 15% since the post-merger spinoff of Embarq. (The spinoff was required to gain the blessing of regulators for the merger.)

"Everybody thought Sprint-Nextel was going to be the superstar, but it's been plagued with so many issues," says Roger Entner, senior vice president-communications sector for IAG Research. "Embarq has largely chugged along."

Sprint's troubles bring no joy to Embarq CEO Dan Hesse. A veteran of AT&T before its merger with Cingular, Hesse was recruited to Embarq by Sprint CEO Gary Forsee. But he also makes clear that Embarq has no significant ties to its troubled ex-parent.

Embarq now has a "Mobile Virtual Network Operator" (MVNO) relationship with Sprint, enabling it to resell wireless service on Sprint's network under its own name. It also buys long-distance minutes. But that's where the association stops. "Customers wouldn't know we have a relationship with Sprint."

As for losing the Sprint brand, Hesse suggests Embarq dodged a bullet. "Sprint did us a favor by taking the Sprint brand."

Innovation is key

Hesse, who was CEO of the old AT&T Wireless when it was part of the pre-merger AT&T, is a big believer in the power of innovation to move markets. That extends to Embarq's wireless business.

"We add a lot of features that focus on the integration of wireless and wireline," Hesse says. ("Wireline" is industry parlance for the traditional phone business.) "We would not be in the wireless business just to sell wireless to customers," he explains. "We are in the business because we think there is an untapped need to have wireless and wireline work together."

And therein, he says, is the secret of Embarq's success to date. "What makes us different (from other local phone companies) is our focus on innovation," he says. "That's not necessarily the first thing people think of when they think of a local phone company."

The local phone business dates to horse-and-buggy days and is shrinking rapidly, thanks to alternative technologies such as Internet and wireless phones. The number of U.S. local phone lines is shrinking about 6% annually — nearly 10% in some markets.

Embarq isn't immune. The carrier, which has about 6.8 million local lines, is losing about 6% each year. Revenue is down year-over-year.

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