Verizon Wireless 2010 Annual Report Download - page 55

Notes to Consolidated Financial Statements continued
53
NOTE 3
DISPOSITIONS
Frontier Transaction
On May 13, 2009, we announced plans to spin off a newly formed sub-
sidiary of Verizon (Spinco) to our stockholders and for Spinco to merge
with Frontier Communications Corporation (Frontier) immediately fol-
lowing the spin-off pursuant to a definitive agreement with Frontier, with
Frontier to be the surviving corporation.
On July 1, 2010, after receiving regulatory approval, we completed the
spin-off of the shares of Spinco to Verizon stockholders and the merger of
Spinco with Frontier, resulting in Verizon stockholders collectively owning
approximately 68 percent of Frontier’s equity which was outstanding
immediately following the merger. Frontier issued approximately 678.5
million shares of Frontier common stock in the aggregate to Verizon
stockholders in the merger, and Verizon stockholders received one share
of Frontier common stock for every 4.165977 shares of Verizon common
stock they owned as of June 7, 2010. Verizon stockholders received cash
in lieu of any fraction of a share of Frontier common stock to which they
otherwise were entitled.
At the time of the spin-off and the merger, Spinco held defined assets
and liabilities of the local exchange business and related landline activi-
ties of Verizon in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada,
North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia
and Wisconsin, and in portions of California bordering Arizona, Nevada
and Oregon, including Internet access and long distance services and
broadband video provided to designated customers in those areas. The
transactions did not involve any assets or liabilities of Verizon Wireless.
The merger resulted in Frontier acquiring approximately 4 million access
lines and certain related businesses from Verizon, which collectively
generated revenues of approximately $4 billion for Verizon’s Wireline seg-
ment during 2009 and approximately $1.7 billion of revenue for Verizon’s
Wireline segment during the six months ended June 30, 2010.
Pursuant to the terms of Verizon’s equity incentive plans, shortly following
the closing of the spin-off and the merger, the number of outstanding
and unvested restricted stock units (RSUs) and performance stock units
(PSUs) held by current and former Verizon employees (including Verizon
employees who became employees of Frontier in connection with the
merger) was increased to reflect a number of additional units approxi-
mately equal to the cash value of the Frontier common stock that the
holders of the RSUs and PSUs would have received with respect to hypo-
thetical shares of Verizon common stock subject to awards under those
plans. In addition, the exercise prices and number of shares of Verizon
common stock underlying stock options to purchase shares of Verizon
common stock previously granted to employees under equity incentive
plans were adjusted pursuant to the terms of those plans to take into
account the decrease in the value of Verizon common stock immediately
following the spin-off and merger.
The total value of the transaction to Verizon and its stockholders was
approximately $8.6 billion. Verizon stockholders received $5.3 billion in
Frontier common stock (based on the valuation formula contained in
the merger agreement with Frontier) as described above, and Verizon
received $3.3 billion in aggregate value, comprised of $3.1 billion in the
form of a special cash payment from Spinco and $0.3 billion in a reduc-
tion in Verizon’s consolidated indebtedness. During July 2010, Verizon
used the proceeds from the special cash payment to reduce its con-
solidated indebtedness (see Note 9). The accompanying consolidated
financial statements for the year ended December 31, 2010 include these
operations prior to the completion of the spin-off on July 1, 2010. The
spin-off decreased Goodwill and Total equity by approximately $0.6 bil-
lion and $1.9 billion, respectively.
On April 12, 2010, Spinco completed a financing of $3.2 billion in principal
amount of notes. The gross proceeds of the offering were deposited into
an escrow account. Immediately prior to the spin-off on July 1, 2010, the
funds in the escrow account representing the net cash proceeds from the
offering were released to Verizon. These proceeds are reflected in the con-
solidated statement of cash flows as Proceeds from access line spin-off.
Verizon received a ruling from the Internal Revenue Service confirming
that both the spin-off and the merger qualify as tax-free transactions for
U.S. tax purposes, except to the extent that cash is paid to Verizon share-
holders in lieu of fractional shares. In addition, Verizon received a ruling
from Canada Revenue Agency confirming that the spin-off qualifies as a
tax-free transaction for Canadian tax purposes.
During 2010 and 2009, we recorded pre-tax charges of $0.5 billion and
$0.2 billion, respectively, primarily for costs incurred related to network,
non-network software and other activities to enable the divested mar-
kets in the transaction with Frontier to operate on a stand-alone basis
subsequent to the closing of the transaction, and professional advisory
and legal fees in connection with this transaction. Also included during
2010 are fees related to early extinguishment of debt. During 2009, we
also recorded pre-tax charges of $0.2 billion for costs incurred related to
our Wireline cost reduction initiatives.
FairPoint Transaction
On March 31, 2008, we completed the spin-off of the shares of Northern
New England Spinco Inc. to Verizon shareowners and the merger of
Northern New England Spinco Inc. with FairPoint Communications, Inc.
As a result of the spin-off, our net debt was reduced by approximately
$1.4 billion. The consolidated statements of income for the periods pre-
sented include the results of operations of the local exchange and related
business assets in Maine, New Hampshire and Vermont through the date
of completion of the spin-off.
During 2008, we recorded charges of $0.1 billion for costs incurred related
to the separation of the wireline facilities and operations in Maine, New
Hampshire and Vermont from Verizon at the closing of the transaction,
as well as for professional advisory and legal fees in connection with
this transaction.