Vermont Rejects Verizon-FairPoint, Citing Shaky Finances
Vermont regulators Friday rejected Verizon’s proposed $2.7 billion transfer of its landline assets to FairPoint. But the Public Service Board said it would reconsider its denial if the companies submit a revised proposal reducing the substantial financial risks that turned the board against this deal. The companies indicated they don’t see Vermont’s action as a deal killer, and that they'll try to ease board concerns.
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“If not for the financial risks associated with this transaction, we would approve this merger, subject to a series of [nonfinancial] conditions” to ensure the public benefits and competition isn’t harmed, the board wrote in its order. The board said FairPoint’s financial projections “fail to take into account risks that have the potential to lead to reduction in service quality, less infrastructure investment and slower broadband deployment than would be acceptable.” The board said the public might be better off with FairPoint replacing Verizon, if it could be assured that FairPoint has the financial resources to keep its promises.
“The Board found that FairPoint had not demonstrated that it would be financially sound as it seeks to operate the newly-acquired territories in Vermont, Maine and New Hampshire -- a service territory that has five times the number of access lines as FairPoint presently has,” the board wrote. It said to complete the transfer FairPoint would borrow $2.5 billion, debt service on which would exert “significant financial pressure.”
The board said FairPoint’s ability to pay debt, maintain dividends, service quality and maintain employment and expand broadband hinge on a stable revenue stream. The board noted that a 5 percent drop in revenue could exhaust the company’s projected cash reserves and put FairPoint in debt default within three years and into bankruptcy within five years. The board said that’s an unacceptable financial risk.
The transaction could bring important public benefits to Vermont, so the board invited the companies to offer ways to ease its risk, such as cutting the price, cutting dividends or creating larger financial reserves. But the board basically left it to the companies to answer the board’s fears that the transaction would leave FairPoint unable to weather even minor business reversals.
The board didn’t discuss the companies’ joint settlement offer in Maine, saying that arrangement couldn’t be part of the Vermont case unless the companies formally proposed it to the board. The Maine settlement proposed a $235 million debt reduction, 35 percent dividend cut, guaranteed annual minimum debt payments, more broadband deployment, and major service quality guarantees. Disputes over whether the service quality guarantees would suffice led Maine regulators to ask the parties to seek agreement and file a revised proposal by close of business Friday.
Assuming the companies proffer an acceptable financial structure, the board said it would impose other conditions on a merger. Major conditions would include: (1) FairPoint must set up a fully separate subsidiary for the Vermont operation. (2) FairPoint must operate under Verizon’s price cap program through 2010, including the program’s retail service quality assurance plan. Nor can it raise basic retail rates or special access rates for three years without board approval. (3) FairPoint must adhere to Verizon’s wholesale service quality assurance program for three years. (4) FairPoint must appoint a senior-level manager with operational responsibilities to act as liaison with the board. (5) FairPoint and Verizon must have an independent third party supervise the cutover of back office billing and network management functions. (6) FairPoint must pay a $5 credit to retail customers subject to a billing error during the first 18 months after closing.
Verizon Vermont President Polly Brown said Verizon had hoped for approval, but said the board “recognized significant benefits for consumers and business in the state.” She said: “Today’s order invites the parties to submit a revised proposal to address the board’s remaining concerns. The parties will evaluate the order and respond accordingly.” She didn’t say whether the companies would offer their Maine settlement proposal to Vermont, but a spokesman noted that Maine and Vermont regulators had expressed similar concerns.
A FairPoint spokesman said the Vermont action is part of an “ongoing process,” and the company is encouraged by the board’s willingness to reconsider its decision. The CWA lauded the rejection, saying Vermont regulators “got it exactly right” in concluding that the sale to FairPoint was financially too risky and could leave Vermont consumers worse off than now. The IBEW said the board correctly recognized that FairPoint “doesn’t have the money to run the state as it should be run.”