Wednesday, September 1, 2010

Corporate Albatross Dept.: FairPoint's struggles continue

Published in the Portland Phoenix

It has been a very long time since our last FairPoint update, but you can rest assured that the North Carolina-based landline provider's downward slide has continued, as the company attempts to restructure its way out of crushing debt through bankruptcy-court protection. Here are a few gems from the past few months.

First up, and most recently, on August 5, MAINE TAXPAYERS GAVE FAIRPOINT A $1.1 MILLION GIFT, when Maine Revenue Services agreed to accept just shy of $400,000 as payment "in full" of a $1.5 million tax bill the company owed the state.

But new math appears to be the way, as the COMPANY'S ACTUAL VALUE IS IN SERIOUS DOUBT. In its October 2009 bankruptcy filing, the company claimed its assets, as of June 2009, were $3.236 billion, with debts of $3.234 billion. An independent valuation of the company, however, set its total worth at between $1.8 billion and $2.1 billion. In another filing, FairPoint says its northern New England assets are worth $1.2 billion — far less than the $2.3 billion the company paid (including $1.7 billion in actual cash), to Verizon to take over landline service in Maine, New Hampshire, and Vermont, a takeover that was delayed several times before finally becoming effective at the end of 2008.

Also, ITS BUSINESS MODEL IS FAILING. The bankruptcy filing is clear: "FairPoint has been unable to attain the performance levels it projected at the time of the acquisition" of Verizon's northern New England business. In 2008, 8.5 percent of customers who had been with FairPoint before the merger cut their landlines. That's pretty bad, but customers who joined FairPoint in the Verizon switch left even more quickly: 12.3 percent of them bailed in 2008 alone, according to court documents. That's a big increase from the 7.3 percent subscriber loss Verizon experienced in 2007, which FairPoint's plan had projected it would beat (meaning lower losses, not higher).

The COMPANY HAS TROUBLE FORESEEING THE FUTURE in other ways, too. Beyond FairPoint's bizarre pre-merger projections, Vermont's Public Service Board (its equivalent of Maine's Public Utilities Commission) ruled in late June that "FairPoint has provided virtually no explanation" for its service-quality promises, saying that "based upon the record before us, we cannot find that FairPoint has demonstrated the financial capability to meet its obligations under Vermont law and its (state license) as a telecommunications carrier."

For that matter, FAIRPOINT HAS PROBLEMS VIEWING THE PAST ACCURATELY. In February, the company announced that it had overstated 2009 revenue by 3 percent, or $26 million.

The COMPANY HAS LEVERAGED ITS BANKRUPTCY TO TAKE ADVANTAGE OF STATE REGULATORS in Maine and New Hampshire, getting permission to delay paying millions in poor-service-quality penalties, and even the potential for them to be waived altogether, if service improves. FairPoint also was given extra time in those two states to roll out its outdated version of broadband Internet access to rural customers. Vermont regulators have so far held firm, but FairPoint is asking them to reconsider, and if that fails the company is expected to ask a federal judge to overrule the state officials.

This is particularly ironic in Maine, because FAIRPOINT HAS SPENT MONEY TO LOBBY AGAINST A HIGH-CAPACITY BROADBAND NETWORK to be built with state, federal, and private funds. The company has argued that such an effort would unfairly compete with the slower-speed and later-arriving service FairPoint promises it will one day get around to providing. But federal funds aren't the real issue: having failed to receive any of the $38 million in economic stimulus money it applied for a year ago, the company has nevertheless applied again, this time seeking $20 million in federal funds to build out its network.

In the past five months, two TOP EXECUTIVES HAVE LEFT, AND ARE BEING REPLACED WITH EXECUTIVES WITH PRIOR CORPORATE BANKRUPTCIES ON THEIR RESUMES. Alfred Giammarino, who became FairPoint's chief financial officer in September 2008, resigned March 31 for what were called "personal reasons." He was replaced July 18 with Ajay Sabherwal, who was CFO for Choice One Communications leading up to, during, and after that company's 2004 bankruptcy restructuring. And David Hauser, appointed CEO in June 2009, was asked to resign by the company's major creditors and did so in mid-August. He has been replaced with Paul Sunu, who was CFO of Hawaiian Telecom when that company, another former Verizon landline property, entered bankruptcy protection in 2008.

And then, if all that wasn't enough, FAIRPOINT HAS ARGUED THAT IT SHOULD FACELESS SCRUTINY FROM STATE AND FEDERAL REGULATORS after it emerges from bankruptcy. Specifically, the company told Vermont regulators that their oversight puts the company at a competitive disadvantage when offering Internet and television services that are not regulated by the state, in combined packages with landline service, which is regulated.

In making this argument, FAIRPOINT HAS FORGOTTEN THAT IT PROMISED THE PUBLIC MORE AND FASTER INTERNET ACCESS as a key element in its argument that its takeover of Verizon would benefit the public. Now that it has sought — and received — permission from state regulators to delay and renege on those promises, the public benefit is reduced. No wonder FairPoint wants less regulation.