Charleston, West Virginia is just one of many cities potentially served by Frontier

Frontier Communications has won approval from state utility commissions in California, South Carolina, and Nevada to take over telephone service currently provided by Verizon Communications.  The decisions were unanimous in all three votes by Commission members, and involve telephone service in several small communities in all three states.

Circles represent Verizon service areas transferred to Frontier in Nevada and California

Verizon’s castoffs serve a small percentage of customers, which made the transaction fly under the media radar in most cases.  In California, Verizon dumps customers in a small section on the northwest border with Oregon.  In Nevada, several small communities south of Reno are involved.  In South Carolina, Verizon drops scattered groups of customers in small clusters across the state.

These state regulatory approvals follow an October 27 announcement by Frontier that its shareholders have approved the transaction, which will result in Frontier owning Verizon’s wireline operations in all or parts of 14 states.

While the approval appeared pro forma in those three states, West Virginia is another matter.  Strong employee union and consumer group protests continue across the state, with many consumers concerned about the implications of Frontier controlling nearly all wired phone lines in the state.  The Communications Workers of America held a conference call with the media Wednesday to outline its opposition to the deal.

The CWA has been a vocal opponent of the deal, claiming it will risk West Virginia’s telecommunications future with a company without the financial capacity to provide the type of advanced services Verizon is providing in other states.  Kenneth Peres, an economist with the Communications Workers of America, said the deal was extremely risky for consumers, workers and the affected communities.

Peres pointed to the perfect record of three out of three failures for earlier Verizon spinoffs.  FairPoint Communications declared bankruptcy early this week after trying to take on the service needs of three New England states.

Peres told the Charleston Daily Mail that if the deal goes through, Frontier “will find it extremely difficult” to meet its $8 billion in debt obligations while simultaneously investing enough capital to maintain its physical plant, improve service quality, set up a new system in West Virginia, lease systems from Verizon in 13 other states, provide video service for the first time (in Indiana), and ensure adequate staffing “while paying out a lot more in dividends than it makes in profits.”

Frontier went on the attack Thursday, accusing the union of interfering just to grab concessions for itself.

Verizon service areas sold off to Frontier in South Carolina

Steve Crosby, Frontier spokesman, said, “They’re just throwing stuff up against the wall. They know this is a good transaction and they’re trying to extract their pound of flesh. They want more concessions. This is their opportunity to ask for more money for their union membership and more benefits. That’s what they want. Union membership across the country is declining. This is how they’re trying to extract as much as they can from either Frontier or Verizon.”

As for Frontier’s debt load, “This is actually a de-leveraging transaction,” Crosby said. “We’re taking on debt but we’re taking on a whole lot more revenue. We’re currently at a 3.8 times revenue-to-debt ratio, going down to 2.6. So we actually get better in terms of revenue to debt. And today we’re fine. We’re able to pay a nice dividend. The day the transaction closes, we are approaching investment-grade borrowings.

“Our board of directors made the decision to lower our dividend by 25 percent when the transaction closes to give us even more cash to invest in infrastructure and to give us even more financial flexibility,” Crosby said.

“Every time we have an argument we win and they bring up other stuff,” Crosby said. “They never bring up the de-leveraging because it undermines their argument. They never bring up the fact that we will reduce our dividend because it undermines their argument.

“We have said we will maintain employment levels for 18 months” after the transaction closes, Crosby said. Because of required regulatory approvals and other factors, the deal can’t close before April 2010.

“So you can figure that’s two years,” Crosby said. “Who nowadays has that kind of job security? I think we’re bending over backwards. I wish I had the pension plan, the job security the CWA has. They’re looking at extracting more from Verizon and Frontier.”

When asked by the newspaper why Frontier shareholders would approve a deal that was destined for failure, Peres told the newspaper:

Frontier’s business model is built on acquisitions. Frontier bought a portion of Global Crossing’s business which increased revenue and access lines “but that began to decline,” he said. “They bought Commonwealth Telephone but that’s flat-lining. What’s the next step? What were they going to do – improve infrastructure or go through the acquisitions route again?” Continuing with acquisitions “postpones the day of reckoning,” he said.

Commentary: Our Take

Crosby’s comments seem more suited for a talk show audience that hates unions.  Obviously the union does not think this is a good deal for West Virginia, and considering the track record of earlier Verizon deals, and the correct predictions from employee unions on their inevitable outcomes, they have every right to oppose the deal on its face.  Crosby apparently has time to address declining union membership, but not the much more relevant decline in the traditional phone company’s bread and butter business – landlines.  Frontier, like other phone companies, continues to see disconnect requests coming from coast to coast as customers dump the phone company for a cable digital phone product, Voice Over IP line, or rely on their cellphone.

West Virginia would be solidly Frontier territory if the state approves the sale

Verizon recognizes their traditional business is a dying one, which is why they are in a hurry to diversify into competitive broadband and video services over their fiber optic FiOS network.  Where it doesn’t make economic sense (under their current business plan) for Verizon to deploy FiOS, decisions are being made about whether to keep those smaller phone operations within the Verizon family, or sell them off to companies like Frontier.  What Frontier acquires today from the standpoint of customers and revenues could represent the high water mark, and without offering robust options for a digital future, Frontier will likely continue to see customer erosion.

FairPoint acquired seemingly healthy Verizon companies serving the entire states of Maine, New Hampshire, and Vermont.  When their efforts to seamlessly combine Verizon’s legacy systems with FairPoint’s own systems failed, that along with an inability to properly service customers, caused a death spiral as customers dropped service, which led FairPoint straight into bankruptcy.

Frontier’s record of investment and service in western New York speaks for itself.  Time Warner Cable eats Frontier for lunch, with less expensive “digital phone” service, much faster and more reliable broadband, and a video package that Frontier doesn’t offer (reselling DISH Network is hardly the same as providing video service that doesn’t come from a third party company’s satellite dish nailed to the roof).  Frontier is ready and willing to stick with DSL service at speeds that are basically maxed out.  Time Warner Cable evidently doesn’t even consider Frontier a significant enough player to deploy upgrades in this area while they are in a hurry to provide them where Verizon FiOS is under construction.

When a company isn’t prepared to keep up with the rest of New York with fiber deployment to the home, the chances of that kind of service reaching West Virginia anytime soon are near zero.

But Frontier’s unique position as a specialist in “rural service” allows it to eke out an existence in areas where cable isn’t a big competitive threat, and where any broadband is better than no broadband at all, at least for now.  But without a plan for keeping up with the fast changing broadband world, customers happy with 3Mbps service today will despise the company for being stuck with those speeds later.  A lot of people in Rochester sure aren’t happy being stuck with Frontier DSL, and that nasty 5GB “reasonable use” language in the Acceptable Use Policy.

Crosby’s comments about CWA member job security, which he evidently envies, says more about the union’s commitment to its members than Frontier has to him.  Perhaps Crosby can quit his spokesman job and switch to a position that gets him CWA membership with a pension and job security.  Perhaps if the people of West Virginia say thanks, but no thanks, Frontier will be in a better economic state than it would be if this mega-deal collapses under the weight of debt and integration challenges.  Then Crosby can keep his job with the evidently lousy benefits.

Peres’ assumption that Frontier lives only through acquisitions isn’t the complete story.  Just like the myth sharks must constantly swim to survive, Frontier doesn’t constantly have to acquire to survive either.  It does have to concern itself with an ever-consolidating telephone line industry, where the smaller independent companies continue to be snapped up by a dwindling number of players.  If a Windstream or CenturyTel comes along with a great offer, Frontier itself may have a new name — Windstream or CenturyTel.

The economies of scale and cost savings are routinely cited by investors promoting consolidation.  It’s no surprise Frontier shareholders voted for the deal.  Bigger is often better for many investors, as long as the quarterly financials play to their interests.  Listening to Frontier investor conference calls, the Wall Street bankers, and the media that support them, are constantly concerned with keeping costs cut to the bone, customer defection limited, risk reasonable, and that dividend being paid.  They are satisfied with Frontier’s rural, less competitive market focus, even if the customers that end up served by them are not.

Barely 18 months after taking control of telephone and broadband service from Verizon Communications, FairPoint Communications collapsed under the weight of enormous debt and an economic downturn, announcing they would declare Chapter 11 bankruptcy this morning.

As Stop the Cap! reported Friday afternoon, sources told us the company had quietly notified key employees of the impending filing, which was expected as early as this weekend.  On Monday morning, the announcement of the filing was made to the media and to an unsurprised customer base of several million dissatisfied customers in Maine, New Hampshire, and Vermont who lived through a never-ending nightmare of bad service and broken promises from a company many believe “bit off more than they can chew.”

Today’s announcement may bring additional scrutiny to the next telecommunications deal Verizon has planned for customers in 13 states.  Frontier Communications, much like FairPoint, wants to take on the operations of a departing Verizon, who wants to disengage from smaller communities to focus on providing fiber optic telecommunications service in larger cities.  Today’s bankruptcy announcement marks three out of three failures for companies assuming control of Verizon’s discarded operations.  Hawaii Telcom declared bankruptcy last December, three years after being sold to The Carlyle Group, a politically well-connected private equity investment firm.  Idearc Media, a Verizon spinoff of the phone company’s print and online yellow pages business declared bankruptcy on March 31st, and FairPoint Communications, which took over Verizon’s northern New England phone operations made its bankruptcy known this morning.

FairPoint executives admit the downturn in the economy and much larger than anticipated conversion problems contributed to the declaration.  FairPoint has accumulated more than $2.7 billion in debt, mostly from the Verizon transaction, and faced difficulty making payments on that debt as credit markets froze and customers fled the terrible service problems that developed when the company tried to integrate 600 Verizon computer systems and software to 60 FairPoint systems on January 30th.

“Those two things contributed to FairPoint having too much debt, at the end of the day,” said David Hauser, chairman and CEO of FairPoint.

Creditors now effectively control FairPoint Communications, and they’ve agreed to forgive $1.7 billion dollars in debt and reduce the company’s interest payments to keep service operational.  Company officials are also looking for savings from cost-cutting measures.  Union officials are extremely concerned that could mean significant job losses for a company already stressed to provide service.  Although company officials characterized today’s announcement as a “non event” for FairPoint customers, many are not so sure.

“There have been a lot of promises made by FairPoint,” one customer told a Maine television station.  “Services that were promised are not being delivered,” said another.

Skepticism was rampant that today’s bankruptcy announcement would be the start of a new beginning for a restructured FairPoint.

“On the news they said that the services would go on as usual, which means crappy,” said one Maine customer in Portland.

Perhaps to underline that sentiment, FairPoint spokeswoman Jill Wurm reported FairPoint broadband’s e-mail service is out of order this evening.  Wurm said anyone with a fairpoint.net e-mail address has been without service since 6pm.  The company was unable to project an estimated time when service will be restored. It was also not known how many customers were affected.

Union leaders said they take no pleasure in the fact their predictions were all-too-accurate about the ultimate outcome of the FairPoint-Verizon deal.

“What good does it do us? We can say it, but we’re left here to deal with it,” Pete McLaughlin of the International Brotherhood of Electrical Workers, which represents FairPoint employees, told the Associated Press.

State regulators across all three New England states plan to keep a watchful eye on reorganization proceedings.  Special consultants and attorneys have been hired to give the states input and guidance as the restructuring commences.  For some consumers, that doesn’t provide much comfort because many of these same regulatory agencies approved the deal in the first place.

Stop the Cap! has extensive coverage of today’s developments from across all three states’ local newscasts.  We’ve also been notified representatives of utility boards now considering a similar spinoff with Frontier have also arrived here to gain our perspective on the sales deal now before them.  For that reason, we will continue covering FairPoint’s final months before today’s announcement to complete the record on FairPoint and its impact on customers, state regulators, and public safety officials.

Our coverage begins with today’s announcement, starting in Maine, where it was a lead story across the state.

[flv]http://www.phillipdampier.com/video/WGME Portland FairPoint Mess 10-26-09.flv[/flv]

WGME-TV in Portland leads their 6pm newscast this evening with the news of FairPoint’s bankruptcy and what it means for customers, some of whom remain skeptical. (5 minutes)

More video to view below ….

… Continue Reading

Phillip Dampier resides in Frontier's largest service area: Rochester, New York

Consumers across 13 states impacted by the proposed Verizon sale to Frontier Communications, as well as existing Frontier customers, should tell regulators to reject the deal.

Those of us living and working in Rochester, New York are extremely familiar with Frontier Communications.  For more than 100 years, Rochester Telephone Corporation provided excellent, independent telephone service to Rochester and a significant part of the Genesee Valley.  The company had a reputation for excellent reliability and charged rates considerably lower than New York Telephone, a Bell subsidiary, in other upstate cities like Buffalo and Syracuse.  In 1995, Rochester Telephone was renamed Frontier Communications, because the company wanted to position itself as something more than just a phone company.

Frontier was acquired in 2001 by Citizens Communications of Stamford, Connecticut, who has provided service ever since.  Ironically, that company thought Frontier was a better name than the one they had used for decades, and Citizens renamed themselves Frontier Communications in 2008.

Today, Frontier Communications serves just under three million customers, primarily in suburban and rural communities in 24 states.

Since Citizens acquired Frontier, and its largest operating service area in metropolitan Rochester, the company has made some changes to the local telephone network.  Fiber optic connections are now common between their central offices and smaller “satellite” central offices.  A local wi-fi network was installed in association with Monroe County, in part as a political maneuver to stop municipally owned and operated affordable wi-fi networks from getting off the ground.  As a concession to the county, a much smaller “free” wi-fi network was also included. (See below the jump for video news coverage of Frontier’s promises vs. reality)

The company’s broadband service relies on ADSL technology delivered by traditional copper telephone wiring, providing service in Rochester at speeds up to a theoretical 10Mbps.  Actual speeds vary tremendously depending on the distance between your home or business and the telephone company central office serving it.  In most smaller communities, speeds are far lower.  In Cowen, West Virginia, Frontier markets broadband service at just 3Mbps, a typical speed for Frontier’s smaller service areas.

Unfortunately, Frontier has shown no initiative to move beyond offering traditional DSL service to its customers, including those in western New York.  Across other New York State cities, Verizon is taking a far different approach.  In larger communities, it is aggressively installing fiber optic wiring to both homes and businesses.  Verizon FiOS positions the company to effectively compete against their traditionally closest competitor – cable television.  For several years, cable operators have offered a better deal for its “digital phone” service, which works with existing home phones but delivered over cable TV lines, often charging less than a traditional phone line, and cable throws in free long distance on many of its plans.

The ubiquitous cell phone has not helped.  Many younger Americans can’t understand why they would want to bother getting a traditional phone line, when the mobile phone in their pocket works just fine, and they can take it with them wherever they go. The result has been a steady erosion of traditional “wireline” phone lines, and a corresponding decline in the revenue earned from the service in many areas.

The Communications Workers of America contract Verizon promises with reality for consumers impacted by earlier deals. (click to enlarge)

In September Verizon CEO Ivan Seidenberg told a Goldman Sachs investor conference that the wired phone line business was effectively dead.  Seidenberg recognized that trying to guess when the company would stop losing “landline” customers was like guessing when a dog will stop chasing a bus.  In other words, the future of Ma Bell is not delivering phone service — it’s deploying advanced networks that are capable of providing customers with video, broadband, and phone service across one wire, preferably a fiber optic one.  Those that can manage the transition will succeed, those who cannot or won’t will face a steady decline to obsolescence.

There is only one major problem — it costs a lot of money to rewire entire communities, much less states, with fiber optic wiring.  It’s like building a phone network from scratch.  A company contemplating such a challenging undertaking starts by asking how much it is going to cost and when will it profit from its investment.  Many on Wall Street don’t like either question because of the up front cost, and are even less happy with the prospect of taking the long view waiting for those costs to be recouped from customers.

To date, Verizon is the most aggressive major phone company in the nation building a pure fiber optic system in its larger service areas.  AT&T, which provides phone service in many states, has taken a more cautious approach using a hybrid fiber-copper wire design they market as U-verse.  A handful of independent phone companies and municipally owned providers have undertaken to wire fiber optics to the home as well, so they can sell video, telephone and broadband service to their customers.

A major challenge confronts phone companies servicing more distant suburban and rural phone customers, often living far apart from one another in sparsely populated regions.  It costs more to service these customers, and the potential revenue gained is often not as great as what can be earned from their urban cousins.  Verizon doesn’t see many rural customers as part of their future business plans and have begun to systematically sell some areas off to other phone companies, usually in tax-free transactions.  One company that sees an ambitious future in serving rural America is Frontier Communications.  For them, finding a niche among the big boys gives them safety and security, particularly in areas that don’t have a cable competitor (or any competitor at all).

Frontier’s acquisition strategy is to sell regulators and the public on the idea that allowing Frontier in guarantees a much better chance for broadband service to reach the communities Verizon skipped over.  Their argument for success in a business seeing steady declines in customers is that broadband service will stem the tide, and help them remain profitable.  More than doubling their size with the acquisition of Verizon’s latest castoffs means more opportunity to market broadband service to those underserved communities.  Frontier argues it can be a more nimble player than Verizon because it has marketing and service experience in rural communities previously ignored by Verizon.

Frontier’s ability to provide broadband service is not the most important question.  More important is how Frontier will define broadband and at what speed. Also critically important is how Frontier will be prepared to deliver the next generation broadband platform that other communities will see with speeds up to 100Mbps, often on fiber optic networks.

Frontier’s reliance on ADSL technology, which worked fine for 1990s Internet connectivity, is increasingly falling behind in the speed race, and for much of the next generation of online content, speed will matter very much.

Unfortunately, the track record for the success of these spinoffs has been universally lousy for consumers and for many employees who live and work in the impacted communities.  Promises made quickly become promises delayed, and later broken as companies like Hawaii Telecom and FairPoint tried to integrate former Verizon operations into their own.  Service outages, billing errors, confusion, and finally a mass exodus by customers looking for better alternatives has been the repeated result.  The faster customers depart, combined with the enormous debt these transactions create for the buyer, the faster the journey ends in Bankruptcy Court.  There is nothing about the Frontier deal proposal that suggests their experience will be any different.

Shouldn’t Three Strikes Mean You Are Out?

Consumers should tell state regulators they should pay careful attention to the failures Verizon has left in its wake from previous deals:

• FairPoint Communications, which assumed control of phone service in Maine, New Hampshire and Vermont just last year declared bankruptcy this morning, even now still plaguing customers with billing and service problems.  The company choked on the debt it incurred from financing the deal.  Before this morning’s bankruptcy, their stock price had lost 95% of its value, and customers were leaving in droves, only accelerating the company’s demise.  FairPoint thought it could integrate Verizon’s byzantine billing system into its own.  Thinking and doing turned out to be two entirely different things.  Frontier has experience integrating other small independent phone companies into its billing system, but now faces the same prospect of dealing with Verizon’s own way of doing everything, and for twice the number of customers Frontier serves today.
• Hawaii Telecom and its 715,000 customers were dumped by Verizon in 2005.  Once again, transition issues plagued the post-sale experience for those customers, and almost a quarter fled the company over three years.  Last December, Hawaii Telecom declared bankruptcy.
• Verizon’s yellow pages unit was also thrown overboard by the company to Idearc in November 2006.  Saddled with $9.5 billion in debt and interest payments representing almost one quarter of the entire company’s revenues, Idearc finally had enough in March 2009 when it also declared bankruptcy.

The deal between Verizon and Frontier could easily follow the same path, as Frontier gets loaded down with massive debt financing the purchase, and has to immediately provide better service than Verizon did, or face a stampede of customers heading for the exit.  The impact of a debt-laden Frontier could be felt by more than just the newcomers.  Existing Frontier customers could also be impacted as the company turns its attention to a potentially lengthy integration process.

The Promise of Anemic Broadband, The Fiber Myth & The 5GB Acceptable Use Policy

Time Warner Cable competes effectively against Frontier DSL in the phone company's largest service area

Frontier’s plan to bring broadband to a larger number of customers is a noble gesture, particularly for households that currently do not receive any broadband service.  Unfortunately, a short term gain of what will likely be 1-3Mbps DSL service will leave these communities behind in the next few years as broadband speeds accelerate far faster than what Frontier is prepared to provide.

Some press accounts in West Virginia have left residents with the impression fiber optic service will reach their individual homes should Frontier be successful in purchasing Verizon’s assets.  There is no evidence to suggest this is true.

In earlier deals, these kinds of rumors started when companies advocating the sale staged press-friendly events announcing a fiber connection between hospitals, schools, or community centers, allowing the media to give the impression there would be fiber upgrades for all… if the deal gets approved.  In the case of Frontier, they have suggested they will continue work on Verizon’s FiOS system in the communities where construction was already underway.  That’s an important distinction for the millions of customers who don’t live in those communities.  Verizon’s FiOS network that is part of this transaction serves less than 70,000 residents.

Residents should consider what possibility their community has of obtaining this type of advanced service when Frontier refuses to provide anything comparable in their largest service area – Rochester, New York.

If they are not doing it in Rochester, do you really believe they will do it in your community?

The company certainly has a competitive need to provide such service in our city where Time Warner Cable has accelerated speeds beyond what Frontier is capable of providing.  Indeed, Time Warner Cable officials tout their largest number of new Road Runner broadband sign-ups comes from departing DSL customers who are fed up with the anemic, inconsistent speeds offered by this aging technology.

In the town of Brighton, I gave Frontier DSL service a try this past spring.  The company promises up to 10Mbps of service to my area, which is less than 1/2 mile from the city of Rochester, and literally just a few blocks from the town’s business center.  After installation, the company was only able to provide me with service at 3.1Mbps, just less than one-third of the speed marketed to local residents.  Even more surprising was the fact they charged a higher price for that service (including taxes, fees, and modem rental charge) than their competitor, Time Warner Cable.

This website was founded after Frontier inserted language into its Acceptable Use Policy defining “reasonable” broadband usage at just five gigabytes per month.  That’s right, the same limit your mobile phone provider applies to their wireless broadband service.  Viewing one HD movie over Frontier’s DSL service would put you perilously close to unreasonable use.

Are consumers willing to give up unlimited Verizon DSL service for a company that refuses to drop a 5GB acceptable usage definition from their terms and conditions?

America is on the threshold of 50-100Mbps broadband service, with some communities already enjoying those speeds.  If your community isn’t served by a competing provider, do you want to limit your future to yesterday’s DSL technology, and then told it is inappropriate for you to actually use it beyond five gigabytes per month?

The Billing and Customer Service Nightmare

The days of local customer service are over with Frontier.  Back during the days of Rochester Telephone, there were several occasions when a local customer service representative would recognize me by name.  Those days are long gone.  Now, a good deal of Frontier’s customer service is handled by a call center in DeLand, Florida.  While the representatives mean well, experiences with them suggest many are not well equipped to understand and consistently market Frontier’s products to existing customers.  Pile on more than double the number of new customers, and the problems are likely to become much worse.

Frontier has personally plagued me with billing errors this past year, gave inconsistent and inaccurate answers to pricing and service inquiries, and created major runaround hassles to correct them.  From the DSL self-install kit that never arrived (requiring me to visit a local office to pick one up myself), to the impenetrable and inaccurate bills that resulted, the company could not correct the problems without consulting someone with supervisor status.  I canceled service within the month.

Customers signing up for service have been pressured into “peace of mind” agreements that lock customers into long term contracts that automatically renew unless the customer actively cancels them (and is certain the request to cancel was processed correctly.)  Frontier has been fined twice by the New York State Attorney General for “misleading advertising and marketing tactics,” once in 2006 and again just a few weeks ago.  Some customers are now waiting for substantial refunds ranging from $50-400 dollars for “early termination fees” charged when they tried to cancel service.

Are you comfortable knowing some customers have been inappropriately placed on a one to three year contract without their full informed consent, and billed hundreds of dollars when they tried to cancel?

The Art of the Deal

By no means will a Verizon-Frontier transaction be the last.  As the industry continues to consolidate around a dwindling number of wired phone line customers, it’s a safe bet there will be more phone customers thrown away by the bigger players.  Nothing guarantees Frontier itself will be freestanding when the consolidation wave ends.  While these deals may make sense for some shareholders and company executives, they often don’t for local experienced employees who know the network and how to provide quality service.  They never have for consumers who will always have to foot the bill to pay off these transactions and have to live with the company trying to integrate Verizon’s bureaucracy with their own.

What is the ultimate price to pay?  For employees — their jobs, and as FairPoint employees are discovering today, those workers are being asked to pay the price for management mistakes.  In West Virginia, some of the most experienced Verizon employees are getting out with their pensions intact, not willing to take a chance on Frontier.  For customers living with FairPoint, horror stories of weeks without service, $400 phone bills for service long since canceled, company technicians that cannot find the customer even when they are located right next door to the phone company, and broken promise after broken promise continue.

Some consumer groups and local workers correctly predicted, in each instance, the horrific outcome of these kinds of deals.  Their uncanny knack to correctly predict disaster contrasts with company marketing, lobbying, and astroturf efforts that promise the sky and tell each successive news reporter covering the latest atrocity that “things are getting better” and “will be fixed soon.”  Unfortunately for too many customers, the fix has to come from a judge in Bankruptcy Court.

The International Brotherhood of Electrical Workers who repeatedly warned about the perils of FairPoint, now warns state regulators about Frontier, and direct attention to the numbers:

If the transaction is approved, Frontier management will have to deal with a 300% increase in access lines (from 2.2 million access lines now to 7 million after the sale) and a 200% increase in employees (from 5,700 employees now to 16,700 after the sale).

Frontier’s debt will increase from $4.55 billion to $8 billion—an increase of over $3.4 billion. Servicing this debt will mean less money for infrastructure, service quality, and high-speed internet build out.

While Frontier argues that somehow this deal will make it stronger, the issue for the states being sold is how much weaker it will make the operations in those states.

The leverage ratio is one way to measure the financial health of a company. The leverage ratio is calculated by taking net debt and dividing it by earnings (before interest, taxes, depreciation and amortization). The leverage ratio for the states being sold will increase from 1.7 immediately before the transaction closes to 2.6 after the sale. The entire deal revolves around Frontier’s ability to cut its operational expenses by $500 million or 21%.

This is significantly greater than the 8-10% cut that FairPoint hoped to achieve—and much of these savings were to be generated from replacing Verizon’s network and back-office systems. Yet, Frontier states that all of the operations except for West Virginia will continue on Verizon’s existing systems—for which Frontier will pay a fee.

Where will Frontier generate the savings—from reduced service quality, workforce, or maintenance of the communications infrastructure? In spite of brave talk from Verizon and Frontier, as recent events have demonstrated, obtaining financing for a transaction this size can be difficult. Frontier does not currently have financing for the additional debt it will take on for this transaction.

As an existing Frontier customer, I’d like an answer myself.

<

p style=”text-align: center;”>

Watch these two Wall Street guys talk about the previous Verizon deals that threw customers under the bus.  Plenty of praise for the skilled deal maker Verizon CEO Ivan Seidenberg, and no concern for you, the consumer and telephone customer impacted by a deal that got a few people very rich and left you with a bankrupt phone company.  (3 minutes)

It’s Not Worth the Risk

Unfortunately, for too many rural Americans impacted by this deal, there is only one phone company.  Cable television is not in their future, and in mountainous regions like West Virginia, wireless phones may not be suitable as a phone line replacement.  Risking 100 years of solvent phone service on a deal that could ultimately follow earlier deals into bankruptcy is not worth the risk.  The nightmares of converting operations from one provider to another is a hassle consumers should not have to face.

For decades, you faithfully paid your Verizon telephone bill and made the company the telecommunications powerhouse it is today.  Now they want to abandon you because, frankly, you just aren’t important enough to them anymore.  It doesn’t have to be this way.  State regulators can tell Verizon they need to make different plans — by forgetting about trying to cash in on a deal that is good for them and bad for you, and by staying put and providing consumers with the same kinds of network upgrades they are building in communities across the country.

Unfortunately, Frontier before this deal was ill-equipped to embark on the kind of investment necessary to provide fiber optic broadband connectivity to its customers.  Now pile on billions of additional debt and the challenge of trying to more than double their size and integrate diverse phone networks in 13 different states and ponder what the chances will be for fiber service after the deal is done.  Far more likely for residents is a company that will rely on slow speed DSL service, providing “good enough for them” broadband for the indefinite future.

Take Action!

As has been the case with Hawaii Telecom and FairPoint, naive regulators believed the false promises and approved earlier deals, and are frankly responsible for part of the blame.  Face-saving telecommunications regulators in New England initially even tried to cheerlead for FairPoint as they stumbled through one customer service nightmare after another.  Too late, they realized the grim reality that their approval saddled their states with a phone company totally unequipped to do the job.

Consumers who do not want a repeat performance can contact their state representatives and tell them to put pressure on each state’s public utility commission to reject the deal.  You should also contact your state’s public utility commission yourself.

No amount of concessions and written agreements will make a difference if that phone company ends up in financial distress and takes a walk to Bankruptcy Court.  Regulators should not even bother trying, after witnessing the debacle with FairPoint.

In your polite, persuasive and persistent communication with state officials, let them know:

• We’ve been down this road with Verizon before, with FairPoint Communications and Hawaii Telecom, leaving a litany of broken service promises, unfulfilled broadband commitments, unacceptable billing mistakes, and poor quality customer service.  In both instances, customers fled and the companies ended up in bankruptcy;
• Frontier has been unable or unwilling to wire its largest service area, Rochester, New York, with the advanced fiber connectivity that Verizon is wiring throughout the rest of upstate New York.  If the company cannot meet the needs of customers in their largest service area, what in the world makes you think they’ll do it for us?
• The company has been fined twice by the New York State Attorney General for dubious business practices, costing consumers hundreds of dollars the company has now agreed to return to those customers;
• A broadband service for our community’s future should not come with a 5 gigabyte monthly limit attached in the fine print.  How can our community compete in the digital economy if you have to ration your broadband usage to an unprecedented level in wired broadband?
• The devil is always in the details.  Verizon has an aggressive plan to stay relevant in a digital future, with video, telephone, and Internet service running across advanced fiber optic lines.  Frontier has a plan to serve rural communities with yesterday’s technology.  Frontier’s vision for video is to “get a satellite dish” and rely on the existing aging copper wiring to do everything else.
• What kind of service and growth can we expect from a company mired in debt?  As seasoned Verizon employees in our community start retiring, understanding the writing on the wall, what do they know that you and I don’t?
• Phone companies are a regulated utility, essential to the public interest.  Why permit a risky deal that could ultimately lead to a taxpayer bailout to keep operations running if Frontier follows its predecessors into bankruptcy, all while Verizon walks away with billions in proceeds?

You can locate the names and contact information for your state representative(s) on Congress.org simply by entering your zip code.  When calling or writing, always be courteous, and request that your representative respond in writing to your concerns, and share with Stop the Cap! any correspondence you receive in reply.  As always, we’ll be holding elected officials accountable.

Your next contact must be with your state public utility commission.  If a hearing is planned in your community, share your views in person and feel free to point them here if they want to watch how bad telecommunications deals have unfolded in the past.  We have countless hours of news reports archived for their viewing pleasure.  Each state has a different procedure for contacting them.  In West Virginia, for example, consumers can call the Commission at 1-800-642-8544.  Ohio residents can fill out an online form.

Perhaps Frontier can one day take on a transaction like this, but only after it can demonstrate it has the resources and willingness to provide customers with better options for service.  Had they done that in our community, local residents would not have taken to signing a petition for Verizon to overbuild, or buyout Frontier’s Rochester operation.  Local residents want the advantage fiber optic service can bring our community and its local economy, some even expressing a willingness to send $10 and $20 checks to Verizon for an acquisition fund to get the sale done.  When consumers give money to the phone company when they don’t owe anything, that should be a clear signal consumers are dissatisfied and want a change Frontier, thus far, has not provided.

There are more videos below the jump….

… Continue Reading

Sources tell Stop the Cap! FairPoint Communications will likely declare bankruptcy as early as this weekend, having failed to survive the crushing debt load it took on over its purchase of Verizon service in three New England states – New Hampshire, Vermont, and Maine.

The catastrophic failure of FairPoint to provide customers with quality service while saddled with enormous debt was never a surprise to those that warned about the perils of approving the transaction at the outset.

The employees of FairPoint are now working on a recovery plan to maintain service and bring back stability to FairPoint customers.  Unlike the senior corporate management of FairPoint, who live in North Carolina far away from the New England nightmares, local employees are committed to bringing their families, friends, and neighbors the service they feel should have been provided by the outset.

What will prevent such a recovery plan from working?  The lenders who hold the paper on FairPoint’s colossal debt and some in FairPoint management who want employee concessions for bad management mistakes.  Wall Street could also move in and demand massive cuts in employees and the infrastructure they need to bring quality service back to northern New England as part of a bankruptcy reorganization.

Once victimized by Verizon, then by FairPoint, and next by Wall Street bankers, the residents of northern New England just can’t win.

The International Brotherhood of Electrical Workers, who were exactly right when they predicted the outcome of the Verizon-FairPoint deal, now could face paying the biggest price for bad management — a loss of their jobs or a cutback in their wages.

Pete McLaughlin Chairman of IBEW SCT-9.  “Demanding cuts in labor costs from employees who aren’t in any way to blame for the company’s woes is the wrong way to go.  The overwhelming burden of billions of dollars in crushing debt cannot be solved by ‘nickel and dime-ing’ our union contracts.  And such attacks will be counter-productive to any attempt to improve operations and the quality of service for our customers.”

Some FairPoint customers want to know, “will those who profited handsomely from the original transaction pay a price?”

As we approach Halloween, it’s time to share a scary story.

The “Reverse Morris Trust” is something a majority of Americans have never heard of before, but if you are a Verizon customer and happen to live in one of 13 states where Verizon is just itching to abandon you, it’s time to learn more about this twister in the tax laws.  A debt-laden phone company may haunt your future.  Another is already haunting millions of New Englanders.

When Verizon throws telephone customers overboard to companies like FairPoint (and Frontier Communications if that deal is approved by state regulators), the company has found a great way to cash out, saddle the buyer in massive amounts of debt, and walk away without paying one cent in taxes.  How?

The Reverse Morris Trust.

To be fair, Verizon is not the first company to use this tax loophole to structure mergers, acquisitions, and spinoffs.  Before 1997, the use of the original Morris Trust provision was commonplace.  A company would split itself into two pieces, one of which would be swapped for stock in an unrelated company.  Then those shares would be redistributed, effectively transferring ownership.  The tax savings were enormous.  A $3 billion dollar sale would normally net the taxman nearly $1 billion in capital gains taxes.  But when using the magic of the Morris Trust, the taxman got $0.00.

In 1997, Congress realized how much tax money they were losing from this loophole.  They enacted Internal Revenue Code Sec. 355(e), which made these transactions taxable.  Or did they?

With billions in savings now potentially gone, businesses started looking for a way around Sec. 355(e) and found one in the Reverse Morris Trust.

Follow this:

A Reverse Morris Trust - "D"=Verizon, "C"=Spinco, "A"=FairPoint or Frontier

Companies involved in a Reverse Morris Trust deal don’t buy and sell from each other directly.  Instead, the seller sets up a new corporation, usually referred to in company financial reports as “Spinco” and conducts the transaction through that entity.

Spinco issues stock (and why not), which is owned by a majority of the shareholders of the parent company cooking up the sale.

When Verizon cast off its New England customers into the fetid waters of FairPoint, it structured the sale as a Reverse Morris Trust.  Verizon “spun off” Bell Atlantic Communications, NYNEX Long Distance, and Verizon New England assets serving Maine, New Hampshire and Vermont into Northern New England Spinco, a new corporation it created just for the deal.  It needed to find a buyer smaller than itself to take advantage of the tax-free magic of the Reverse Morris Trust.  It found FairPoint Communications, a tiny independent phone company based in North Carolina, dwarfed by the three New England states’ Verizon customers.  Imagine living alone in a one bedroom apartment and then letting The Brady Bunch move in with you.

Spinco, by design, has an addiction to piling on debt.  It’s like giving a shopaholic a wallet full of credit cards all issued by Verizon.  Spinco lards itself with as much debt as it possibly can.  When it’s finally teetering under the weight of  as much as $1.7 billion in debt, Verizon effectively sends a bill saying “we want our money — pay us back our $1.7 billion in full.”  Of course, Verizon doesn’t expect to receive the check.  Instead, it demands Spinco pay a “dividend” in the form of an IOU for the entire amount.

Spinco now has a problem.  Its balance sheet looks terrible.  Would you buy a company that has a $1.7 billion liability on its balance sheet?  FairPoint would, but of course, they knew this was part of the plan all along.

FairPoint now seeks to merge with this Spinco company that has more debt than some third world countries.  State regulators announce they have to examine this deal to make sure a company like FairPoint, now proposing to take on Spinco’s debt, will be able to run the company, make investments in its upkeep and expansion, and still pay back the Bank of Verizon, or whoever else ends up owning the IOU.

Regulators (foolishly) go ahead and approve the deal, and the newly merged Spinco and FairPoint issue stock to Verizon shareholders, the original owners of Spinco.  Verizon also gets cash and securities.  Technically, Verizon shareholders now own 60% of FairPoint.  Of course, nobody says every shareholder gets an equal vote.  In the end, FairPoint runs and manages the entire operation, or tries to, saddled with what is now $2.5 billion in debt and on the brink of bankruptcy.

How much did taxpayers lose from all of this?  Considering the spending machine in Washington is going to get the money from somewhere (us), they are going to be looking at you and I for the estimated $700 million Verizon never had to pay in capital gains taxes.

Make your check payable to “U.S. Government” and make sure it’s in the mail by Halloween.

Yes, this scary story is true, and has a sequel: Frontier and Verizon plan to structure their magic deal using the same technique.

Boo!  (Now add another zero on the dollar amount of your check.)

If this new deal is approved, Verizon walks away with $3.3 billion in tax-free cash.  Verizon shareholders (lucky them) get to be owners of just under 70% of Frontier Communications, soon to be saddled with its own Spinco debt which will run well into the billions.  Knowing this, they dump their stock in Frontier in droves as soon as the deal completes.  Why hang around for another financial Titanic to sink like a rock around their portfolio?

Verizon customers get to join the Frontier Family, and those of us who are already members get to see whether Frontier can survive the minimum monthly payment on that debt.

Or maybe not.

A large contingent of the New England Congressional delegation has written a letter to Rep. Charlie Rangel (D-NY), who chairs the Ways and Means Committee responsible for overseeing tax policy in Congress, asking that a stake be driven through the heart of the loopholes in the Reverse Morris Trust.

Reps. Michael Michaud, Chellie Pingree, Peter Welch, Paul Hodes, and Carol Shea-Porter all signed the letter asking Rangel to reform the Reverse Morris Trust (they abbreviate it “RMT”) and take it away from companies like Verizon looking for a tax-free windfall:

We projected that the transaction [FairPoint-Verizon] would have disastrous consequences in our states.  Unfortunately, our concerns were well founded with widespread consumer dissatisfaction evident across the region.

Recently, we have learned that other states across the country face similar threats to service and employment as Verizon, once again, seeks to avoid taxes through the use of the RMT in its proposed transaction with Frontier Communications.

[…]

Now is the time to restrict the utility and benefits of the RMT to protect the public interest.

West Virginians, in particular, have expressed increasing concern about their state following a similar path northern New England took. Frontier would assume control over all of Verizon’s operations across the state of West Virginia.

“I hope this vital request, now based on past history, isn’t ignored again,” said Elaine Harris, International Representative with the Communications Workers of America.  “West Virginia is being given the opportunity to avoid some of the pitfalls of the FairPoint disaster and it would be a real shame if we simply follow the same path and our communications operations end up in bankruptcy.”

Expect the usual Washington lobbyists to fight to preserve the loophole.  Remember, in the world of Halloween telecommunications finance, tax free trick or treat candy is for closers.