FairPoint deal gets green light from state PUC

AUGUSTA, Jan 04, 2008 (Bangor Daily News - McClatchy-Tribune Information Services via COMTEX) -- FRP | charts | news | PowerRating -- Almost a year after it was first announced, FairPoint Communications' proposal to buy Verizon's northern New England telephone and Internet land lines was approved unanimously by Maine regulators late Thursday night.

At about 7:30 p.m., after nearly 10 hours of discussions, the Public Utilities Commission put forth a list of conditions necessary for its three members to approve the deal worth $2.7 billion.

One condition called for an additional reduction of FairPoint's debt by $100 million. The PUC suggested this money come from Verizon, but shortly after 9 p.m., Verizon rejected the condition.

FairPoint, however, offered a solution. It promised to evaluate its financial situation at the end of 2011, and if it has not met certain thresholds, it will reduce its debt by $150 million by the end of 2012 by selling off assets, issuing stock or reducing dividends.

"I think what they've proposed has a shot at achieving what we want it to achieve. I think the company has made a pretty good faith effort to meet the conditions that we want it to achieve," Rich Kania, a member of PUC's advisory staff, said in response to FairPoint's proposal.

"FP is a much better bet [than Verizon] in terms of providing value to consumers," Commissioner Vendean Vafiades said before the other commissioners concluded they would approve the deal.

A mild congratulatory applause erupted when the deliberations ceased at 9:30 p.m., but not everyone was happy.

The International Brotherhood of Electrical Workers and the Communication Workers of America -- both representing Verizon workers -- has continued to oppose the deal, arguing that FairPoint would be left without the financial resources to meet its obligations to workers and stockholders and its promises to consumers.

Early in the hearing Thursday, their attorney Scott Rubin said that while a proposed settlement agreement reached in December improved FairPoint's financial condition as compared to the original filing, it did not improve it enough.

Before issuing the conditions Thursday, PUC Chairman Kurt Adams said he was "troubled deeply" by the labor unions' dissatisfaction with that settlement agreement and hoped the new conditions would satisfy their concerns. They did not.

"I think the commission made a huge mistake by accepting a last-minute offer from FairPoint that they didn't truly understand. The effect will be to put tremendous pressure on FairPoint to slash costs as much as possible in 2011 so they can reach the magic numbers. It will have an affect on service quality, on customer service and on the people who work for the company," Rubin said after the deliberations were adjourned at 9:30 p.m.

FairPoint CEO Gene Johnson, on the other hand, was ecstatic.

"I'm really gratified that the commission and the chairman worked as hard as they did," Johnson said at the end of the night. "We're looking forward to serving the citizens of this state and will do so with great vigor."

The final settlement uses a variety of financial maneuvers to reduce the amount of debt FairPoint had originally planned to take on by about $350 million. The deal is worth $2.7 billion, but FairPoint would essentially pay a discounted price to take ownership of Verizon's 1.6 million access lines and Internet service in Maine, New Hampshire and Vermont.

Despite the Maine PUC's support, however, the deal still requires approval from Vermont and New Hampshire regulators. On Dec. 21, Vermont's Public Service Board rejected the deal but said it welcomed a revised application. New Hampshire's PUC staffers have recommended against the initial proposal, but said they are also willing to consider a revised deal.

The conditions the Maine PUC proposed Thursday were based on the settlement agreement, or stipulation, submitted Dec. 13 and amended Dec. 21 by several parties in the case, including Verizon, FairPoint, PUC support staff, AARP, several smaller Maine telephone companies and the state's public advocate.

The PUC agreed that the stipulation was crafted in a way that was fair to all parties, but it still needed to address labor unions' concerns about FairPoint's financial stability as well as privacy concerns voiced by residents and the Maine Civil Liberties Union.

Aside from the debt reduction, the conditions included:

ä The current federal wiretapping case involving Verizon would continue and Verizon would continue to represent itself in the case. In that case, the federal government is trying to stop the PUC from forcing Verizon to divulge whether it provided customer call records to the government without a warrant.

ä A requirement for FairPoint to file with the PUC a privacy policy that articulates how the company will guarantee the privacy of its telephone customers, so as to prevent any future cases like the one involving Verizon.

ä The negotiations taking place in New Hampshire and Vermont may not adversely affect FairPoint's financial situation.

Thursday's evening deliberations in Augusta came after a five-hour hearing on the stipulation. During the hearing, the commissioners combed through the 20-page document, asking Verizon and FairPoint attorneys to explain or reword legal and technical language.

During the deliberation session, the three members of the PUC openly discussed their conclusions after months of listening at public hearings and reviewing thousands of pages of written testimony.

Adams said he wanted to see the purchase price of the deal reduced by an additional $100 million because he believed FairPoint had overestimated its projected business revenues in Maine.

Earlier in the day, FairPoint attorney Joe Donahue had cautioned that a further reduction in the sale price could be rejected, as it could make the sale unprofitable for Verizon.

FairPoint's financial strength and stability has been the main sticking point in the deal since it was announced in January. The company's business model and revenue forecasts are based partly on the loss of 4.7 percent of its land lines to competing Internet and telephone service businesses by 2015. Adams said Thursday that Time Warner has been a successful competitor and he estimated the line loss would be at least one or two percentage points higher than FairPoint's projection.

"I agree," said Commissioner Sharon Reishus. "What if the projected number of access lines or the number of employees is different than FairPoint had predicted? Things will probably go well, but there's no guarantee of that."

Adams said he also wants to see FairPoint "become investment grade by 2014," referring to the quality of the company's credit. In 2014, FairPoint is scheduled to refinance its debt and its credit rating would affect interest rates.

Verizon and FairPoint hope to close the deal by Jan. 31.

To see more of the Bangor Daily News, or to subscribe to the newspaper, go to http://www.bangordailynews.com. Copyright (c) 2008, Bangor Daily News, Maine Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

Morning Coffee with TradingMarkets -- Free Newsletter

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index