Verizon angles to keep state business

Published in the Portland Phoenix

Democratic governor John Baldacci had a private sit-down with Ivan Seidenberg, the president and CEO of Verizon, November 30. The meeting wasn’t publicized in advance and got only a small amount of coverage after the fact.

None of that coverage mentioned the roughly $6 million Verizon earns from providing state agencies with telephone services (that total doesn’t include in-state and out-of-state long-distance calls, which, according to state technology chief Dick Thompson, are also provided by Verizon at a rate of 2.98 cents per minute).

The meeting came just days after the staff of the Public Utilities Commission issued a devastating report recommending that regulators reject the proposed buyout of Verizon’s telephone landlines by FairPoint Communications (see “No Raises for Seven Years,” November 16, and “No Raises — It Gets Better,” online November 20, both by Jeff Inglis).

Neither Verizon nor Baldacci’s folks will say specifically what was discussed, but Verizon Maine spokesman Peter Reilly says the meeting was intended “to discuss Verizon’s role in the state in the future,” specifically the fact that “Verizon is going to be continuing to invest in businesses in the state.”

It’s fair to ask what business, given that PUC analyses of Verizon’s investment in landlines and consumer services such as Internet access suggest the company has done little, if any at all, in recent years (see “Internet Disconnect,” by Jeff Inglis, 24).

The answer may explain why Seidenberg wanted to talk to the business-friendly Baldacci: Verizon will continue to invest in wireless service in Maine, as well as “enterprise services,” Reilly says. He wouldn’t explain what “enterprise services” are, but the company’s Web site does — telephone service and high-speed Internet communications for large businesses.

The meeting between Seidenberg and Baldacci was first reported on VerizonVsFairPoint.com, a blog closely monitoring the merger’s progress, where speculation ran rampant about whether Verizon was trying to cut a deal with Baldacci. All sides deny that.

Asked if Seidenberg was trying to make nice with Maine officials after the PUC staff’s report repeatedly accused Verizon of hurting Mainers by spending too little on service quality and upgrades, Reilly's answer was short: “All I can confirm is that Mr. Seidenberg met with Governor Baldacci.”

But if Verizon was trying to hang onto its revenue from public coffers, Thompson (who heads the state agency that arranges phone service for state offices) may have killed it: if the sale goes through, he says, the state’s phone provider would become FairPoint. Unless the gov says otherwise, of course.

Press Releases: Plum Creek watchdog

Published in the Portland Phoenix

Thanks to a Phoenix reader, Maine residents now know something the Portland Press Herald was not telling them: that the chief executive officer of the development company that wants to build nearly 1000 units of homes and condos plus two resort hotels in Maine’s North Woods joined the board of directors of the newspaper’s parent company 18 months ago.

To call the Plum Creek project controversial is an understatement, as attested by the 60 or so stories and editorials that the Press Herald has published on the subject in the past year and a half.

Yet none of those pieces — not even the editorials that questioned the deal — disclosed that Rick Holley, CEO of Plum Creek Timber, the project’s proposed developer, joined the board of directors of the Blethen Corporation (the family-owned company that owns the Press Herald) back in May 2006. Nor did they disclose that Holley joined at the personal request of patriarch Frank Blethen, as a Plum Creek spokeswoman told the Portland Phoenix last week.

In a December 2 article, PPH environment reporter John Richardson detailed Plum Creek’s donations to Maine politicians, quoting Bruce Freed, executive director of the Center for Political Accountability in Washington DC: “What they’re trying to is develop relationships and influence decision-making and policy.”

But Richardson’s story didn’t mention another way Plum Creek could influence decision-making and policy — namely, through close connections with the newspaper’s owner.

It’s possible, as Poynter Institute ethicist Kelly McBride notes, that the paper’s editorial team may not have actually known that Holley had joined the board. (If they did know, she says, they should have disclosed it earlier.) As it was, the disclosure came after the Phoenix, prompted by posts on thePhoenix.com, called Richardson and others at the Press Herald.

On Sunday, a Richardson article about Plum Creek added that Holley also sits on the board of the Seattle Times Company, though he (or his editors) took pains to distance Holley from the Press Herald, specifying that the company’s Maine newspapers (the Press Herald, the Kennebec Journal, the Morning Sentinel, and the Coastal Journal) have “a separate board of directors” on which Holley does not serve.

But not every article addressing Plum Creek in Sunday’s paper carried the disclosure: columnist Bill Nemitz left out the relationship between the people who sign his paycheck and the man at the helm of the largest private landowner in the country, who just happens to be the proposer of one of the largest land-development projects in Maine history (see “Up Plum Creek Without A Paddle,” by Yanni Peary, November 30).

That omission, and the 18 months of silence throughout the paper, fit a pattern of concealing the connections between the newspaper and Plum Creek: in the 20 mentions of Plum Creek in the Seattle Times since May 2006, none have disclosed Holley’s involvement.

Corey Digiacinto, communications manager for the Seattle Times Company, would not say how many directors the company has, nor whether Holley is a voting member of the board (versus an advisory one). She says the company doesn’t normally talk about its corporate structure, but did so “in this case, for reasons of disclosure.”

Why now, though, if Holley has been on the board for 18 months? Digiacinto referred that question to Press Herald/Telegram editor Jeannine Guttman.

Guttman and Richardson did not return phone calls seeking comment, as is the paper’s general practice when receiving inquiries from other media organizations.

But with Phoenix readers keeping watch where the Press Herald fears to tread, they’ll have to do better next time.

Disclosure: I like plums, and have swum in creeks. With a tip of the hat to the poster named “Jay” on thePhoenix.com.

Courts allow photographs of documents

Published in the Portland Phoenix

Back in September, we told you that a Maine judge had issued a secret, unwritten order barring people from taking pictures of court documents (see "Speak Now, or Forever Pay for Copies," by Jeff Inglis, September 28). The practice, a popular tactic among reporters and members of the public alike to avoid the expense of buying official copies (at $2 for the first page and $1 for each additional page), had been permitted by court officials for more than five years. Last week, a memo went out from state-court administrator Ted Glessner to all Maine court clerks and their staffs re-authorizing the practice.

There has been no formal change of policy, but that too is in the works, according to Maine Chief Justice Leigh Saufley, who says the court system expects to take another two months to finalize new rules regarding using cameras in courtrooms during proceedings. The two topics are related because the no-cameras-in-courtrooms rule at the moment bars cameras from entering courthouse buildings at all, which would obviously prevent taking pictures of paperwork.

In the meantime, regarding the specific act of photographing documents, there will be “an internal order that tells everybody it’s okay,” Saufley says.

“It’s perfectly appropriate for people to use cameras to take photographs of documents,” she says, noting that existing rules — and the ones under consideration to replace them — bar people from photographing only participants in a trial, including judges, witnesses, attorneys, and defendants, without the judge’s prior written permission.

The larger problem is that “every single cell phone sold today has a camera in it,” Saufley says — and many laptop computers, too. Cell phones, cameras, and laptop computers are banned from the federal courthouse in Portland (though laptops are allowed for a “privileged few,” such as attorneys working on cases, according to federal-courthouse staff).

Saufley says the Maine courts have a tradition of being more open to electronics than the federal courts. (Also, the federal limits are at least partly offset by Internet access to court filings, which are not available for state-court cases.)

But while people can again bring cameras into state courthouses for the purposes of photographing documents, and Saufley appears unenthusiastic about banning cell phones and laptops from courtrooms, using cameras during trials and other court proceedings will likely continue to be restricted.

Court officials have talked to members of the state’s television media about their needs, and the state’s advisory Committee on Media and Courts is at work on crafting rules that would, in effect, state that “we don’t want to stop people from bringing cameras into the courtroom,” Saufley says, but “you can’t use cameras” there without advance permission.

Shopping advice from the star: The Marden’s lady lets you in on her secrets of surviving Black Friday

Published in the Portland Phoenix

If anyone in Maine knows how to shop with gusto, it’s the Marden’s lady. You’ve seen her all over the TV — you may have even seen her around town. The woman knows how to spot bargains, values, deals, and great items like nobody else in the state.

She doesn’t give out her name because of “trouble with paparazzi,” but we managed to find her, which led right into one of her problems: “One of my hardest things about shopping is the people that follow me because I am not only glamorous and a sex symbol, but they know I’m a consummate shopper. Sometimes I go in disguise.”

The Portland Phoenix convinced her to take a break from shopping in a quiet part of town, and got her to share her thoughts on how to survive — and even to thrive — on Black Friday.

ADVANCE PREPARATION
“You gotta start early,” she says. “Like about a week and a half, two weeks in advance, you gotta start stocking up on the mini-marshmallows. ... You start drinking cocoa and you think of everything you can stick ’em in. Load the sugar on, because from here on out, it’s gonna be a sprint.”

She also observes that you might not be able to fit everything you buy into your car at once, and advises: “Get a few rental storage units, strategically placed between shopping areas, so you can drop off what you’ve got and go on to the next place. All you gotta do is rent ’em for a week.”

THE DAY BEFORE
“You don’t ever want to eat turkey on Thanksgiving. All that tactrotactlycicerin or trychtelactin, everything that slows everybody down. ... The goal is to get speeded up. My mantra is ‘Caffeine, caffeine, caffeine, burn, baby, burn.’ ... Tofu turkey is never okay. I’ve eaten enough tofu in my life to know that. ... The bottom line of Thanksgiving is to stay away from things with feathers. If the Pilgrims had stayed away from everything with feathers, there’d be a lot more Native Americans here today.”

GETTING READY TO GO
What to bring
“Allen’s Coffee Brandy could come in handy. I suggest you always keep your flask with you. I store mine in my hat.” Also, “Daddy’s wallet. Daddy’s huntin’ while I’m shoppin’. The men are all out wandering with their guns at all hours.” We think that means they don’t need their wallets.

Dealing with kids
“Daddy can’t take ’em huntin’ and you can’t take ’em shoppin’. You gotta feed them a lotta lotta turkey, and you tuck ’em into bed real tight. If they’re too young to be on their own, then maybe you have the neighbor kid look in on ’em.”

Dress the part
“Get deep into your own kind of style, because that is going to help your intuitive being. Do not wear one of those coordinated tracksuits — you’re gonna be confused all day.”

IN THE STORE
Find the perfect item
“It is kind of a religious experience. You walk in the store and you gotta receive, and when you start seeing an aura in a particular aisle, you gotta run. Until you see that aura, I suggest you run in place. You don’t know where they’re going to have hid the best stuff, so you gotta stay ready.”

Handle other shoppers
“I think a Taser might come in handy.”

Keep up your health
“It’s imperative at one point during the day to get some of that fresh-air shopping — do not miss it. Inhale short, quick breaths to recharge.”

If you shop in groups
“Be very careful, because you can avoid strangers, but it’s always your friends that hurt you the worst. If a friend grabs that one item you had your eye on, she won’t put it down. You can will a stranger to put an item down and then you grab it, but a friend know it’s worth something to you. ... I never shop in a herd. I like it when Daddy goes huntin’ alone — it’s safer.”

Share deals with friends
“Stay connected, cell phone at the ready, but hands-free. Do not call arbitrarily. A good friend is gonna buy two — if she finds something she’s going to buy two because she knows you need it. That may be difficult when it comes to ponying up for the things she bought you, though. ... You can lose good friends. If they like it and you didn’t buy them something, they won’t forgive you.”

WRAPPING UP
Find a checkout line
“Pick a cashier that’s smilin’. If they’re not havin’ fun, then you’re not gonna have fun.”

Pay for your purchases
“Always pay in cold, hard cash. However, cash can be hard to come by, so what you want to do and what you end up doing are two different things.”

Get it to the car
“You’ve seen those people on TV who carry things on their heads. There’s a real advantage to that because when the cart’s full, you can push it with one hand and hold more on your head with the other. Also, people get out of your way."

Sidebar: PUC filings: Selections from the redacted text

Published as an online exclusive at thePhoenix.com

1: condition 1, p 3

The proposed transaction must be restructured to allow FairPoint to reduce its bond debt level by $600 million, thereby reducing the associated interest expense and debt leverage levels. A $600 million reduction in bond debt for the new enterprise is important and appropriate because:

the bond debt will carry a materially higher interest cost than the bank loan;

the bond debt issuance is at this point entirely uncommitted and subject to prevailing difficult credit market conditions;

bond debt reduction results in debt leverage ratios that are lower and more consistent with the Embarq and Alltel spin-offs (although still not as low);

bond debt reduction results in debt leverage ratios that are more consistent with investment grade bond ratings, which in turn are crucial for a public utility providing a necessary and essential service under challenging business conditions;

bond debt reduction will increase cash flow and permit further discretionary reduction of bank loan debt;

even if bond debt is reduced at this level, proceeds to Verizon [BEGIN SUPER CONFIDENTIAL] will still exceed the implied wireline valuation as calculated by Verizon. [END SUPER CONFIDENTIAL]

2. (footnote 17, p 12)
17 The amount of debt that would be borne by FairPoint was an important consideration for Verizon. Its original information letter, sent to sent to parties possibly interested in purchasing the NNE properties, asked for [BEGIN CONFIDENTIAL] “the specific total dollar amount of debt” that the FairPoint could support. [END CONFIDENTIAL]

3. (footnote 34, p 20)
34 There is no doubt about the risk that interest rates will rise, and FairPoint recognizes that risk. The federal funds rate that is contained in [BEGIN CONFIDENTIAL] the “Control” page of the FairPoint financial model is 4.75%. [END CONFIDENTIAL] However, the federal funds rate, as of July 12, 2007, was already higher -- at 5.25%. Brevitz Direct, p. 41, ll. 20-24.

4. p 21
FairPoint is not [BEGIN CONFIDENTIAL] making a commitment to use its surplus cash to reduce [END CONFIDENTIAL] its debt. 39 FairPoint’s financial model suggests that by the year [BEGIN CONFIDENTIAL] 2015, FairPoint would have reduced its debt by $318 million. However, as Walter Leach confirmed at hearing, that reduction is only an assumption, made for modeling purposes. FairPoint is making no plan and no commitment to reduce its debt over the next seven-year period. [END CONFIDENTIAL]40Id

5. p 21, footnote 38
38 Id., p. 43, ll. 1-3. Even with its limited ability to hedge interest rates, FairPoint remains exposed to trends of increasing interest rates, particularly since [BEGIN CONFIDENTIAL] its financial projections show that it will continue to have significant long term debt, and will have to refinance most if not all of that debt, $1.5 billion or more, at or before maturity. [END CONFIDENTIAL]Brevitz Direct, p. 43, ll. 3-8.

6. p 21, footnote 40
40 In its response to OPA-I-30-6, FairPoint states [BEGIN CONFIDENTIAL] “FairPoint has not made and is unwilling to make a binding commitment to use cash flows after dividends solely for debt reduction.” [END CONFIDENTIAL]OPA Exhibit# 25.

7. p 23, footnote 45
45 Originally FairPoint proposed a debt leverage ratio for the new entity of “3.25 to 3.5 times earnings before interest, taxes, depreciation and amortization, referred to as EBITDA, which would result in a leverage ratio of 3.6 to 3.7 times EBITDA for the combined company.” FairPoint Communications Form S-4A, filed July 2, 2007, p. 55. FairPoint expressed reservations about taking on higher levels of debt: [BEGIN CONFIDENTIAL] “although we believe that pro forma leverage for NewCo could potentially be raised as high as 4.5x, providing maximum de-leveraging for Verizon, we do not believe this would be positively received by the equity markets as a more conservative leverage level.” [ENDCONFIDENTIAL]Brevitz Direct, p.24, ll. 21-24, fn.28. However, it appears that Verizon’s interests prevailed in negotiations because the debt leverage of the proposed transaction as announced is 4.1x. Brevitz Direct, p.25, ll. 1-3.

8. p 23, footnote 46
46 The advice provided to FairPoint by Lehman Brothers concludes: [BEGIN CONFIDENTIAL] “For tax reasons, a cash sale is not attractive for Viper whereas the Spin/RMT structure would be tax-free; to qualify as a tax-free transaction, Viper must retain 51% of equity following the transaction, but can own more; Viper also intends to use a debt-for-debt swap to achieve greater tax-free deleveraging.” [END CONFIDENTIAL]OPA #112 (FairPoint HSR documents, attachment 4(c)-3, Project Nor’easter Discussion Materials, Lehman Brothers, February 20, 2006, page 6.)

9. p 28
There is no “low hanging fruit” here.

[BEGIN CONFIDENTIAL]
2006 REVENUE PER LINE

Local
Services
& LD
$ 368 FAIRPOINT
$ 371 ALSK
$ 385 IWA
$ 400 CTL
$ 422 CNSL
$ 443 CZN
$ 465 NNE
$ 501 WIN
[END CONFIDENTIAL]

10. p 29
There is no “low hanging fruit” here.

[BEGIN CONFIDENTIAL]
2006 REVENUE PER LINE

Access
Services &
USF
$ 197 CZN
$ 210 NNE
$ 347 ALSK
$ 377 IWA
$ 399 WIN
$ 408 CTL
$ 486 CNSL
$ 524 FAIRPOINT
[END CONFIDENTIAL]

11. p 29
The results of the disaggregated analysis of the data & internet category are also shown in Table IV. It shows that NNE’s revenues per access line from this category are at the bottom of a wide range. There is revenue opportunity here, but it is not “low hanging fruit” due to the fact that DSL service revenues [BEGIN CONFIDENTIAL] as projected in the model are driven by very substantial penetration rate assumptions already accounted for. (“Detail” tab, rows 55 and 58). The model has consumed the fruit in its assumptions. [END CONFIDENTIAL]

12. p 30
Furthermore, the DSL model results show the importance of assumptions regarding charges between affiliates, in particular the DSL line sharing charge assumed in the model.

29

[BEGIN CONFIDENTIAL]
2006 Revenue Per Line

Data & Internet
$ 40 NNE
$ 51 WIN
$ 96 ALSK
$ 114 FAIRPOINT
$ 130 CNSL
$ 155 IWA
$ 163 CTL
$ 195 CZN
[END CONFIDENTIAL]

13. p 33, note 61
61 Loube Direct, p. 28, ll.14-16. According to FairPoint’s financial model, “Other ISP” revenue increases from [BEGIN CONFIDENTIAL] $5.6 million in 2008 to $16 million in 2010 and then drops back to $5.3 million in 2012. Those estimates are driven by percentage change estimates. However, there is no connection between the percentage change estimates and other features of the model. [END CONFIDENTIAL]Loube Direct, p. 28, ll. 14-19.

14. p 33, note 63
63 The Commission should also question the reasonableness of the assumptions made in FairPoint’s model regarding revenues from local service. However, it is difficult to identify those assumptions. [BEGIN CONFIDENTIAL] Reviewing the model, it is not possible to assess what FairPoint’s underlying assumption might be regarding loss of access lines over time. Nevertheless, it is clear from Verizon’s due-diligence materials that Verizon believes FairPoint is underestimating future line loss rates. [END CONFIDENTIAL]Brevitz Direct, pp. 76-77.

15. p 34
** Unrealistic Assumptions As to Annual Operating Expenses.
With respect to operating expenses, the assumption in the financial model is that for the 2008-2015 period FairPoint is expecting those expenses [BEGIN CONFIDENTIAL] to remain virtually flat [END CONFIDENTIAL]64

However, that assumption is completely unrealistic. For, example, it is not reasonable to assume, as the model does, that FairPoint NNE will have [BEGIN CONFIDENTIAL] zero [END CONFIDENTIAL] wage increases for seven years. There is no reason to believe that, over the next seven years FairPoint’s operating expenses will not be affected by cost increases from suppliers, increases in the cost of gasoline and electricity, wage increases, and other inflationary increases. Over the last five years, Verizon’s NNE properties have had a unit operating-expense growth rate of about 6% to 7%.65 In the twelve months ending March 31, 2007, FairPoint’s per-unit operating expense increased by 8.1%.66 Iunreasonable to expect that FairPoint can reduce that growth rate to the rate of growth assumed in its financial model.

16. p 35, note 67
67 For the key years of 2005, 2006, 2007, and 2008, [BEGIN CONFIDENTIAL] 79% to 82% of the operating expenses in the model cannot be tied to a verifiable source. [END CONFIDENTIAL]
Brevitz Direct, p. 81, ll.17-22.

17. p 35, note 68
68 FairPoint’s projections of the up-take for DSL over the next four years cannot be accurate because it has not been able to develop the specifics of its broadband deployment plans:[BEGIN CONFIDENTIAL] FairPoint will not have access to detailed plant records until after the closing of the proposed transaction. “Due to the fact that detailed plant and engineering records and resource relating to the to-be-acquired properties will not be available until after the transaction closes, FairPoint had to make a number of assumptions in generating the Maine Broadband Plan.…”[END CONFIDENTIAL]Brevtz Direct, p. 85, ll. 3-8, citing FairPoint’s response to OPA II-10-1.

18. p 36
** Different Balances for Shareholders Equity. The inputs to FairPoint’s financial model with respect to the balances of shareholders equity are not reasonable. The model projects negative balances for shareholders equity that are significantly different than the balances that FairPoint has projected in its Form S-4A report to the Securities Exchange Commission (SEC). Negative equity is an indication of the financial weakness of FairPoint. In its SEC report, FairPoint projects that starting in 2007 shareholders equity will decline almost $900 million dollars, to a negative $218 million in 2015.71 However, FairPoint’s financial model projects different balances for shareholders equity – balances that are significantly [BEGIN CONFIDENTIAL] more negative. [END CONFIDENTIAL] 72 In short, the inputs used in the model—which do not reflect reality -- appear to be part of an effort to “sell” the proposed transaction.

19. p 36, note 70
70 For UNE-L’s, for the years 2008 through 2012, FairPoint’s model projects [BEGIN CONFIDENTIAL] growth rates in the range of 14% to 20% annually. Those projected growth rates are substantially higher [END CONFIDENTIAL] than the annual growth rates experienced for UNE-L’s nationwide. Brevitz Direct,p. 86, ll. 4-13. Dr. Loube makes the same points at pages 33-34 of his Direct Testimony.

20. p 36, note 72
72 The financial model projects that, starting in 2008, the balances for shareholders equity will decline [BEGIN CONFIDENTIAL] by approximately $590 million dollars, to a negative $452 million in 2015. [END CONFIDENTIAL]Brevitz Direct, p. 87, ll. 9-11.

21. p 37, note 76
76 Indeed, in one of its Hart/Scott/Rodino documents, FairPoint’s senior management acknowledged the risk of unplanned capital expenditures that exists because FairPoint does not know the condition of the NNE operating plant. FairPoint acknowledged a “challenge” regarding [BEGIN CONFIDENTIAL] “unknown plant quality—probably poor—may consume a lot of capex to compete with Time Warner”. [END CONFIDENTIAL]Brevitz Direct, p. 60. ll.13-15; OPA Exhibit #112(FairPoint HSR Documents, Attachment 4(c)-11, at page 1). The FairPoint financial model simply [BEGIN CONFIDENTIAL] extends past Verizon capital-expenditure patterns forward, and does not adjust for the “unknown plant quality—probably poor” that it will begin operating after close of the proposed transaction. [END CONFIDENTIAL]Brevitz, Direct, p. 60, ll.16.19.

22. p 39, note 83
83 In its financial modeling, FairPoint did perform one “Material Adverse Change” scenario that was designed essentially to assume that no synergies occurred. That scenario shows that, with no synergy effect, [BEGIN CONFIDENTIAL] each year FairPoint would face climbing leverage ratios, and have essentially no cash left after payment of expenses, interest, taxes and dividends. [END CONFIDENTIAL]Brevitz Direct, p. 58, ll.4-11. That scenario suggests that the financial success of the transaction depends, in part, on full achievement of the estimated synergy savings – which, in turn, suggests that the proposed transaction is pretty risky.

23. p 42
** Employee Pensions or Other Post-Employment Benefits. The model makes the (inappropriate) assumption that, post closing, FairPoint will [BEGIN CONFIDENTIAL] have no expenses for either employee pensions or other post-employment benefits (OPEB). The model assumes (also inappropriately) that FairPoint will not incur those types of expenses for its newly hired “incremental” employees. [END CONFIDENTIAL] 95

24. p 47
This analysis indicated that, based on the Verizon stock price at that time, its wireline business had an [BEGIN CONFIDENTIAL] implied wireline multiple of 3.7x 2007 EBITDA. [END CONFIDENTIAL]99 Comparison of that EBITDA multiple to the proposed NNE transaction multiple of 5.6x 2007 EBITDA shows the extent to which FairPoint is overpaying for the NNE wireline business compared to the market’s judgment as to what that wireline business is worth.

25. p 48
Verizon’s valuation materials demonstrate that the upper end of valuation estimates is [BEGIN HIGHLY CONFIDENTIAL] produced by “acquisition comparables”, and is $3.04 billion, compared to the $2.715 billion proposed transaction price.100 The lower end of the valuation range is produced by discounted cash flow analysis, and is $2.064 billion. Hence, it can be seen that the transaction valuation as proposed is in the upper third of the valuation range—and for “a car without the engine”. [END HIGHLY CONFIDENTIAL]

Furthermore, the same document demonstrates that the proposed transaction price is well above [BEGIN HIGHLY CONFIDENTIAL] the implied valuation of Verizon’s wireline business in its stock price. Verizon’s own analysis demonstrates that the market values Verizon’s wireline business at 3.7 times 2007 EBITDA. On the other hand the transaction price results in FairPoint paying 5.6 times 2007 EBITDA. [END HIGHLY CONFIDENTIAL]

26. p 49
100 OPA # 94 Verizon HSR documents, “Confidential Presentation Materials prepared for the Verizon Board of Directors Regarding Project Noreaster”, Merrill Lynch, January 15, 2007, page 13.

101 CITE, Transcript, Brevitz, xxx.

Verizon’s own data and analysis support Mr. Brevitz’s statement at hearing that Verizon is charging FairPoint too much for the transaction, even though FairPoint has agreed to it. In effect, FairPoint has agreed to a “bad deal”.101 The fact that the transaction is for “a car without the engine” greatly exacerbates this “bad deal”. The Public Advocate’s recommendation that the amount of debt proposed for FairPoint be reduced by $600 million serves to bring the proposed transaction to a place that ameliorates the considerations above, but still results in proceeds to Verizon [BEGIN HIGHLY CONFIDENTIAL] that are well above Verizon’s implied wireline valuation of 3.7x, down from the transaction price of 5.6x to 4.4x. END HIGHLY CONFIDENTIAL]

27. p 73
Of particular note is the fact that FairPoint’s financial model assumes a monthly payment from the unregulated entity to the regulated telephone company of [BEGIN SUPER CONFIDENTIAL] $30.11 [END SUPER CONFIDENTIAL] per DSL line per month.133 See, Ex RL-10 of Loube Surrebuttal, Response to ODR-16. While examining super confidential exhibit RL-10 attached to the surrebuttal testimony of Dr. Loube, Mr. Leach agreed that, when viewed as a stand-alone business, the DSL business BEGIN SUPER CONFIDENTIAL: loses more and more money as time goes on:

MR. JORTNER: Okay, now let’s turn to the gross margin which is line 296 which is the line that the OPA added and this -- on the margin reported on row 296 are all negative and getting larger all the time, is that correct?

MR. LEACH: Generally that’s correct, yes sir.

MR. JORTNER: And if those numbers are correct it would indicate that the company is losing money on all these services correct?

MR. LEACH: No, that’s not correct. I think you cannot look at that number without the inner-company eliminations because part of the reason those margins are negative is because part of the cost structure is revenue being paid to the telephone company for providing these kind of services.

MR. JORTNER: Right and that’s what I’m getting to next because we’re trying to look at the DSL business by itself. So when we -- I’ll get to that issue. In fact the difference between the two pictures of profit has to do with the cost of goods sold, eliminations which are row 297, correct?

MR. LEACH: That’s correct. [END SUPER CONFIDENTIAL]. TR Oct. 3 at 45-46.

28. p 86
In addition, evidence in this proceeding reveals two other bases to conclude that FairPoint would be acquiring a utility with rates that are already inflated. [BEGIN CONFIDENTIAL]: On cross-examination, FairPoint witness King was asked to explain the large distinction between the higher costs allocated by Verizon to northern New England’s regulated utilities and the much lower comparable costs of other ILECs that Mr. King analyzed. Although Mr., King was hesitant to agree with Mr. Hagler that this necessarily represented “regulatory failure,” Mr. King candidly admitted that Verizon’s high cost allocations did not seem reasonable based on his experience. TR Oct. 5, at 11. Moreover, in Verizon’s HSR document, Confidential OPA Ex. 94, Verizon describes as one of FairPoint’s interests as (under “Access Line Market Characteristics), “Potential disposition lines are less dense, have fewer business customers and fewer areas targeted for FTTP, but produce higher margins than VZ average.144(emphasis added) [END CONFIDENTIAL]