Verizon Pulls Plug on Mexican Standoff

Verizon (VZ Quote) threw out the kitchen sink Tuesday, raining down a staggering $3 billion in charges. But hearty investors took cover under the telco's steady earnings guidance.

The New York-based local phone giant reaffirmed 2003 "adjusted" financial projections, which call for operating profits to slump from last year's levels on flat revenue. First, however, the company rolled out a raft of mostly noncash charges to reflect accounting changes, the sale of a failed Mexican wireless investment and various severance, debt repayment and asset-impairment costs.

Wall Street shrugged off the news: The stock slipped 45 cents, to $39, remaining near the top of its robust recent range. Still, the writedowns highlight the challenges facing Verizon and its Baby Bell peers, which are struggling to curry investors' favor in the face of an eroding core local phone business, unexpected regulatory setbacks and a massive debt burden.

Tilting at Windfalls

The lion's share of Tuesday's charge, $1.6 billion, comes from an arcane accounting decision that will put Verizon on the same page as its regional Bell peers when it comes to the highly profitable but slow-growing phone book business. But the ugliest tale could be found in the unwinding of the company's Mexican wireless adventure.

That $900 million write-off reflects the planned sale of Verizon's 39% share of Grupo Iusacell (CEL Quote), Mexico's No. 3 wireless telco. Verizon's decision to sell its stake for less than a penny on the dollar closes out an ambitious effort to plant seeds in what was once seen as a fast-growing and highly lucrative Latin American market.

Verizon predecessor Bell Atlantic took a stake in Iusacell in 1994, starting a relationship that eventually saw investments of more than $1 billion. But like so many of its peers in the heavily leveraged, heavily hyped wireless business, Iusacell found that the upfront costs of building a national network, coupled with hefty sales, marketing and administrative expenses, kept the company from delivering returns to investors. Eventually, big backers such as Verizon and Vodafone (VOD Quote) sought to flee.

Verizon now stands to reap a whopping $4 million from the pending sale of its stake to Movil Access, a Mexican paging outfit owned by tycoon Ricardo Salinas. The company plans a second-quarter charge of 33 cents a share to record the write-off.

Fingers Walking

Other charges included in Tuesday's writeup were less embarrassing. To smooth the flow of proceeds from its yellow pages operation, Verizon will book revenue over the 12-month life of the directory instead of on the publication date. Peers SBC (SBC Quote) and BellSouth (BLS Quote) already follow this practice.