Unions urge probe of Verizon deal

[MaineDem]

MONTPELIER, Vt. - Union leaders are urging the Legislature to investigate the sale of Verizon telephone lines to Fairpoint Communication before the deal is approved by state regulators.

The $2.72 billion deal to buy lines in Vermont, New Hampshire and Maine will greatly expand the Charlotte, N.C.-based company's number of telephone lines and workers.

"We don't think they have the resources to pay for the debt they are going to acquire," Mike O'Day, district vice president for the Communication Workers of America, said at a Wednesday rally at the Statehouse.

http://pressherald.mainetoday.com/news/state/070126verizon.html

[On the Road]

1. The Debt is a Legitimate Concern

For decades, state governments have set limits on the amount of debt local phone companies can carry. This led to more conservative management and less specualtive business practices. But, in this case, only part of the money will be borrowed:

The company will partly finance the deal by offering $1 billion in common stock.

That leaves $1.7B to be financed by bonds. Here's roughly how the right hand part of Fairpoint's balance sheet looks now and would look after the acquisition:

                             Before              After
Long Term Debt               $607M         $2,300M
Total Liabilities             661           2,360
Total Stockholder Equity      247           1,247

Debt/Equity Ratio             1.9             1.9

Looks like it was structured to maintain the same debt ratio. Local phone still generate lots of cash, so they should be able to meet interest payments. So although it's a big acquisition, it doesn't look irresponsible. The stock has steadily gone up over the past year, so analysts seem optimistic:



I suspect the union concerns have just as much do with changing employers as with the financials. Verizon (formerly NYNEX) has historically been accomodating to the IBEW and CWA. Fairpoint, based in the South, may not be such a generous employer and might even try to break the union.

As far as customer experience with Fairpoint, billing problems are endemic to the telephone industry -- customers of every telco have horror stories, and every telco has been told that it's the worst in the industry at various times. Maybe Fairpoint is worse. But the underlying billing systems are going to remain the same as under Verizon. If the systems are ever consolidated, it will take years to complete.

If I were a customer, I would be worried about whether Fairpoint will continue to expand DSL coverage and introduing fiber services. But I suspect the deal will be approved and a lot of customers won't even realize they have a new phone provider.

Note: I am a Verizon employee, although I don't have any special knowledge or this deal or any strong feelings about it. It was big surprise to hear the announcement last week.