Frontier Communications Can Learn A Lot From Fairpoint-Verizon Deal
14 May 2009 - 6:47AM
Dow Jones News
Fairpoint Communications Inc.'s (FRP) current struggles may
portend tough times ahead for Frontier Communications Corp. (FTR)
in the aftermath of its deal with Verizon Communications Inc.
(VZ).
Their scenarios are similar. Both merged with Verizon's rural
territory, paid Verizon in stock and agreed to pay a follow-up
amount in cash through a debt offering. However, while Frontier
expressed optimism about the deal Wednesday, Fairpoint said last
week that it needs help with its capital structure.
"A debt structure such as it appears Frontier will take on makes
it far more difficult to have resources" for investment in
broadband, said Candice Johnson, a spokeswoman for the
Communications Workers of America. "Consumers in northern New
England are in that situation now with Fairpoint on shaky ground
and not able to make the kinds of investment that communities and
customers want and need."
There are lessons to be drawn from Fairpoint's struggles.
Frontier needs to take better care of its balance sheet. It also
needs to be aggressive in investing in its infrastructure, or face
the same kind of deteriorating business Verizon was eager to
sell.
Fairpoint and Frontier agreed to a deal structure called a
Reverse Morris Trust, which is beneficial because it's tax-free to
Verizon. Under the current deal, Frontier will give Verizon
shareholders $5.3 billion in stock, and pay $3.3 billion in cash
raised through a later debt offering.
Verizon gets debt relief without paying taxes, while Frontier
triples in size and has the opportunity to tap an underserved
market.
Verizon Chief Executive Ivan Seidenberg called it a win-win
situation. But is it?
Fairpoint agreed to a similar deal with Verizon to absorb its
New England rural assets, which the two companies completed early
last year. It had to relieve Verizon of $1.7 billion in debt.
The goal was also the same: Utilize Fairpoint's expertise on the
local level to unlock value Verizon has missed because of its focus
on faster-growing wireless and FiOS businesses.
While sound in theory, it hasn't worked out so well in practice.
Fairpoint has succeeded in reducing the number of access line
losses, but its credit picture is a mess. Last week, the company
warned in its first-quarter results that it was considering hiring
a financial adviser to evaluate its capital structure and explore
potential restructuring.
Following its report were a slew of credit downgrades by the
major investment rating firms.
Fairpoint declined to comment.
There are indications that Frontier could avoid Fairpoint's
fate. Frontier Chief Executive Maggie Wilderotter sounded confident
about a smooth integration, and noted that it already serves in 11
of the 14 Verizon states. Fairpoint, however, operated in the three
states it acquired from Verizon.
Frontier also seems to have a closer eye on its balance sheet.
Chief Financial Officer Donald Shassian said the company was
changing its credit philosophy and would seek an investment grade
rating. He noted that the deal with Verizon puts it in a better
investment position because the overall company will have a lower
debt ratio than before.
Unlike with Fairpoint, the ratings agencies seem to approve
Frontier's move. Moody's put Frontier on review for a possible
upgrade, while Fitch Ratings put the company's debt on Ratings
Watch Positive.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020;
roger.cheng@dowjones.com