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THIS WEEK'S NUMBER: 93 as in I 93
Verizon-FairPoint deal gets unfavorable review
September 16, 2007
The rumors gained some credibility this past week. An analyst for the Public Utilities Commission issued a scathing review of the proposed $2.7 billion sale of the Verizon landline phone and high-speed Internet business in Maine, New Hampshire and Vermont to FairPoint Communications. The buyer is valued at $1 billion and plans to borrow $1.7 billion for the deal, financing another $1 million by issuing new stock.
The PUC's consultant, John Antonuk, founded the Liberty Consulting Group in Pennsylvania and gives expert testimony across the country. The Legislature gave the PUC $100,000 to hire somebody like him to scope out the mega deal. He said its risks far outweigh the benefits because FairPoint is biting off more than it can chew.
"In its current form, the transfer from Verizon to FairPoint cannot be found to be for the public good," Antonuk said.
The consultant praised the buyer for bold plans to spread high-speed Internet to rural communities and boost the range of products. Portsmouth, Dover, Epping, Exeter, Hampton, Kingston, Newmarket, Rochester, Rye Beach, Seabrook and Somersworth would gain wider service over existing copper lines, including 100 cable channels and pay-per-view video. But FairPoint would have trouble meeting its goals, he warned.
Antonuk's big concern is the $100 million FairPoint would pay Verizon in the first four months to continue its billing and certain other functions until the buyer is ready to run a network six times the size of what it owns now.
The total cost for this outsourcing to the seller would reach $300 million if it lasted 18 months.
Antonuk fears that FairPoint might have financial problems, stop paying dividends to investors, lose its credit rating, forego capital improvements, and harm the telecommunications market.
Antonuk said Verizon sold a comparable network in Hawaii to Hawaiian Telcom, which experienced what he deemed "a major disaster." Two years later, the system and billing operations were still full of glitches, he said.
Walter Leach, the FairPoint vice president for corporate development, said the proposed debt load is healthy and typical for the industry. A projected $1.5 billion in yearly revenue would fund a robust business plan, he said, one that protects existing jobs and hires 675 more people, including 250 in New Hampshire. He confirmed the fallback plan is to reduce dividends to ensure quality service if it comes to that, but it won't.
Antonuk advised the PUC to make FairPoint freeze its rates for the first three years, reduce its debt ratio, hold the buyer accountable to its promises, and measure its progress in the field and in its cash flow through frequent audits.
Leach said negotiations are under way with the PUC and other stakeholders. He hopes the sale closes in January and said FairPoint can smoothly manage the operation by June. A transition consultant has worked on the problem for more than a year, he said.
Antonuk called that schedule optimistic.
Jill Wurm, the New Hampshire spokeswoman for Verizon, said the utility disagrees with all the assumptions in Antonuk's report and looks forward to a full vetting of his concerns.
"We will work with the staff of FairPoint and the other parties to see if there is common ground to address the issues raised," she said.
Rep. Paul McEachern and Sen. Martha Fuller Clark, both Portsmouth Democrats, were worried about the sale as soon as it was announced in early summer.
"I can't see how it will help the customers," McEachern said. "Competition is what helps them."
Fuller Clark warned against creating a situation that jeopardizes all the communications in the state.
"We have a tremendous responsibility to make sure FairPoint can do what it says."
Rep. Lee Quandt, R-Exeter, had lunch this past week with Mike McLaughlin, the lawyer for the Verizon union, which has intervened in the PUC approval process. The meeting helped Quandt make up his mind.
"I don't think it's good for New Hampshire," he said.
McLaughlin said half the 1,200 workers are near retirement and want to protect their pensions. He also said the infrastructure is old and poorly maintained, and the landline business is declining 5 percent a year because of cell phones. FairPoint might have to raise its rates or cut labor costs, he said.
"They own 300,000 miles of lines in six states," McLaughlin added. "They're taking over 1.5 million miles. It's like Joe's Paving taking on I-93."
The lawyer said Verizon chose a small buyer so it could reap a $700 million tax break through a loophole called a Reverse Morris Trust.
"It's designed to let you spin off a company without paying capital gains," he said. "They couldn't have sold to AT&T. It was too big to qualify for the break."
There are many, many more issues that need to be examined. This is just a snippet of what's wrong with this deal. For more in depth details, please go on-line to www.no-deal.org. This is a bad deal for consumers, tax payers, rate payers, our communities and for the economic growth of New Hampshire.
