Tuesday, June 30, 2009

FairPoint Communications - I Told You So!

I promised myself I wasn't going to say this again, but I lied.

I...TOLD...YOU...SO.

The questionable sale of Verizon wireline assets in northern New England (Maine, New Hampshire, and Vermont) to FairPoint Communications was something I was against from the beginning. The price tag was too high and FairPoint was buying into an operation that was many times its size, but an operation that was already suffering a decline in customers as they fled to wireless (cell phone) or digital phone services provided by the cable companies because they were far cheaper, more convenient, or both. That decline accelerated after FairPoint took over operations and quality of service declined.

Now unless FairPoint can renegotiate its loan terms it won't be able to make the interest payments due this October. This could force them into bankruptcy.


Fairpoint Communications could file for bankruptcy before the end of the year, if its debt holders don't agree to allow the company to postpone interest payments, according to a recent filing with the Securities and Exchange Commission.

The North Carolina telecommunications company, which took over Verizon's landline phone network in New Hampshire, Vermont and Maine, has faced continual service, technical and financial problems. According to the filing, the company does not expect it will be able to pay the interest due in October on $530 million in loans. The SEC filing, submitted Wednesday, asks the company's lenders to exchange their notes for new loans that would give FairPoint more time to repay.

Prior to the sale in April 2008, the utility regulators of all three states questioned the original $2.7 billion sale price agreed to by Verizon and FairPoint, saying it was too much for the assets being sold. The sale price was renegotiated to just above $2.1 billion, a value that many believed (including me) was still too high. Financing also hit a snag when interest rates for the loans climbed from 8% to over 13% just days before the sale, making the costs higher.

This sale has been a bad deal for the consumers right from the beginning. FairPoint promised deployment of broadband technology to areas not covered by any kind of broadband services. Unfortunately they chose to use DSL, a technology that is already considered to be obsolete because it cannot provide the bandwidth necessary for many present and future broadband services. Other technologies have already passed them by, particularly wireless.

My mother-in-law recently subscribed to Verizon's Wireless Broadband service, which became available in her rural town (population ~700) late last year. FairPoint hasn't deployed DSL there yet and isn't likely to any time soon. They're having trouble enough trying to maintain telephone service in the area, let alone deploy DSL. She has connection speeds that are faster than FairPoint's DSL service in a lot of towns presently being served by them.

FairPoint's financial problems do not bode well for the consumer, particularly if they end up filing under Chapter 11. I expect they'll end up selling of some of the assets they bought from Verizon. Perhaps Verizon will buy them back, specifically the FiOS FTTH services in southern New Hampshire and southern Maine, making Verizon a direct landline competitor of FairPoint. (Verizon is already a phone service competitor through Verizon Wireless).

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