After years of financial problems, union problems, and service problems, customers of FairPoint Communications in northern New England report the company has stabilized operations and has been gradually improving service. A hedge fund holding 7.5% of FairPoint agrees, and is now pressuring FairPoint’s board of directors to sell the company, allowing shareholders that bought FairPoint stock when it was nearly worthless to cash out at up to $23 a share.

That almost guarantees shareholders a huge profit while likely saddling whoever buys FairPoint with the same kind of sale-related debt that bankrupted FairPoint in 2009.

Maglan Capital’s David Tawil and Steven Azarbad communicated their displeasure to FairPoint CEO Paul Sunu in a letter earlier this summer that complains “shareholders have been extremely patient with the company’s operational turnaround and have suffered because the board has not been vigilant in protecting shareholder value.”

“Not as patient as FairPoint’s own customers that spent several years of hell dealing with Verizon’s sale of its landlines in Vermont, New Hampshire, and Maine,” said FairPoint customer Sally Jackman, who lives in Maine. “It looks like the hedge funds want their pound of profits from another sale, exactly what FairPoint customers don’t need right now.”

Jackman endured three weeks of outages after FairPoint took over Verizon’s deteriorating landline networks in northern New England. The nearest cable company – Time Warner Cable, is almost 50 miles away, leaving Jackman with FairPoint DSL or no broadband service at all.

“Wall Street doesn’t care, they just want the money,” Jackman added. “They probably assume Frontier will pay a premium for FairPoint and then we can go through the kind of problems customers in Texas and Florida dealt with for over a month.”

The hedge fund managers argue that FairPoint “has made enormous strides” and notes “revenue is stabilizing and growth is coming.”

Maglan is well positioned to cash out with an enormous gain, having been an investor in FairPoint since the phone company declared Chapter 11 bankruptcy almost six years ago. The fund held shares when their price dipped below $4. Now, assuming FairPoint will put shareholders first “in ways that other wireline telecom companies do,” investors like Maglan hope to see a sale at a share price of $23, a 75% premium.

“With the company’s labor challenges behind it and with it $700 million of long-term debt removed from FairPoint’s balance-sheet, the time has come for the company to be sold or to be merged into a peer,” the hedge fund managers write.

Tawil (L) and Azarbad (R)

Maglan recommends the company be sold to Communications Sales & Leasing, a tax-sheltered Real Estate Investment Trust spun off from Windstream with no current experience running a residential service provider. CS&L primarily provides commercial fiber services for corporations, institutions, and cell phone towers. Shareholders would benefit and CS&L would benefit from diversification, argues Maglan. But the hedge fund has nothing to say about the sale’s impact on FairPoint customers.

Maglan also demanded that while FairPoint explored a sale of the company, it must turn its investments away from its network and operations and start “generating value for shareholders immediately.” Maglan wants FairPoint to turn spending towards a $40 million share repurchase program (to benefit shareholders with a boost in the stock price) and initiate a recurring shareholder dividend payout. To accomplish this, FairPoint will have to designate much of its $23 million of cash on hand and a hefty part of the $52 million of free cash flow anticipated in 2016 directly to shareholders. The company may even need to tap into its revolving credit line if financial results are worse than expected.

Tawil and Azarbad characterize their plan as “well within the range of comfort.”

“It is high-time that the company and the board turn its attention directly to shareholders and, specifically, unlocking shareholder value,” the hedge fund managers add. “We have been a very patient group.”

But perhaps not as patient as they thought. This week, Maglan demanded that FairPoint remove four of its board members — Dennis Austin, Michael Mahoney, David Treadwell and Wayne Wilson, demanding they “immediately tender their resignations” and warned Maglan would push for a special meeting if no action was taken. The reason? Tawil and Azarbad said they did not think the four were “critical to the board in any way.”

“Wall Street has been about as useful as cancer for those of us trying to communicate with the outside world up here,” Jackman said. “I hope all three states get copies of these temper tantrums, because if FairPoint does sell, maybe this time they won’t approve the deal. After all, even the Titanic only sank once.”

Independent television in Great Britain may soon be in the hands of U.S. citizen John Malone, former cable magnate and head of the giant Liberty Global cable and entertainment conglomerate that has swept across western Europe through a series of mergers and buyouts.

Deregulation has allowed the prospect of Britain’s biggest independent network, dwarfed only by the BBC, to soon be owned lock, stock, and barrel by Americans.

U.S. media conglomerates have already picked up the smaller Channel 5 network, purchased by Viacom in a surprise $757 million deal.

ITV produces an enormous number of television shows for its network of regional independent television stations across England, Scotland, Wales, and Northern Ireland. It is these productions that are attracting attention from content-hungry U.S. media companies.

John Malone’s Liberty Global is seen as a leading contender, already owning a 6.4% stake in ITV acquired from BSkyB for $824 million. Liberty Global and Discovery Networks have maintained close association and jointly bid $930 million to acquire All3Media, the production arm of reality shows like “Undercover Boss.”

ITV’s own needs for programming have increased dramatically with the introduction of digital free-to-air television across the United Kingdom. ITV’s single network, operating for decades, is today accompanied by ITV 2, 3, 4, Citv, and Encore.

Malone hopes to build a European media empire, and has amassed holdings including a takeover of Virgin Media and cable systems in Germany and the Benelux region.

Malone has wooed some of ITV’s biggest investors — all American — including Fidelity, which has a nearly an 8% stake, BlackRock, with 4.9%, and the California hedge fund manager Brandes, which has 4.8%.

Malone may face other bidders, however, notably Comcast-NBCUniversal, which has not yet publicly revealed whether it is interested or not.

Another potential benefit of the transaction would be to allow its American buyer to avoid U.S. taxes by relocating their corporate headquarters to Great Britain in a controversial practice known as tax-inversion.

LightSquared, the ill-fated venture to bring nationwide 4G wireless broadband to the masses may be all but gone and forgotten in bankruptcy reorganization proceedings, but the wireless spectrum it controls and the drama surrounding it is not.

A battle between billionaires and the hedge funds they support has broken out over who will ultimately control the failed venture — a hedge fund manager deep in LightSquared debt or the richest man in Colorado that often finds a way to get his way.

Harbinger Capital Partners’ Phil Falcone

Falcone

Phil Falcone earned his first fortune trading junk bonds in the 1980s. In 2001, he launched Harbinger Capital Partners and by 2007, Falcone and his investors were well-positioned for a blizzard of cash betting against sub-prime mortgages just before the housing collapse and credit crisis that followed. Falcone took home $1.7 billion in compensation that year while an epidemic of foreclosures and upside down mortgages was just getting started.

In late 2008, when the economy was in free-fall, Falcone suspended or limited withdrawals from his largest funds, upsetting investors who couldn’t get their money out. But Falcone reportedly gave special treatment to certain large investors (sources say Goldman Sachs is among them) who were able to clear out their exposed accounts before the losses piled up.

By 2009, Falcone was again making money — so much he vastly underestimated his federal and state tax bills. What’s a cash-strapped billionaire to do? Quietly loan himself $113.2 million from one of his investment funds at a favorable interest rate and keep it a secret from investors for five months. When they eventually found out, they were understandably disturbed. Falcone had barred those same investors from cashing out of the fund he borrowed from.

The Securities and Exchange Commission was not happy either and filed charges against Falcone.

“Today’s charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully,” Robert Khuzami, director of the S.E.C.’s division of enforcement, said in a statement. “Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others, and violated trading rules intended to prohibit manipulative short sales.”

Despite the publicity generated by the SEC, investors who appreciated Falcone’s ability to earn them money allowed them turn a blind eye to the ethics questions and pour money into Falcone’s latest venture — a wireless network known as LightSquared.

LightSquared was preparing to launch a unique nationwide 4G LTE mobile broadband network powered by satellites and ground-based cell towers, selling wholesale access to third-party wireless companies able to market the service under their own brand. Falcone’s funds poured nearly $3 billion dollars into the venture while getting a waiver from the government to operate high-powered transmitters on the “L” band — 1525-1559 MHz. LightSquared’s plans alarmed the next door neighbors — GPS satellites facing interference issues that would hurt the accuracy of precise location information provided to millions of tracking devices on the “L1” band — 1559 to 1610 MHz.

Initial testing showed that significant interference from the prototype ground-based transmitters would occur and potentially could cripple aviation and public safety GPS users. The FCC eventually withdrew permission for LightSquared to run its network as planned, a potential death-blow to the venture.

Creditors grew anxious wondering how LightSquared would be in a position to repay its loans when it was unable to launch its wireless network.

In May 2012, creditors forced the issue and LightSquared filed for bankruptcy protection, listing assets of $4.48 billion and debts of $2.29 billion. Falcone claimed the bankruptcy filing would give the company more time to overcome the FCC’s objections to its network operations plan. Falcone estimated it would take two years to secure a resolution. Analysts familiar with the FCC suggested Falcone might die of old age before the agency gave way.

Falcone’s subsequent efforts to win back control of the venture have been made more difficult because one man has been quietly buying up large amounts of LightSquared’s debt with designs on the venture’s spectrum.

Dish Networks’ Charles Ergen

With LightSquared’s debt trading at around 50 cents on the dollar, Charlie Ergen went shopping.

Ergen has been involved in the satellite business for decades. Today, he controls and runs Dish Network, a satellite television provider that has seen the back of high customer growth. Dish and DirecTV are both locked out of the “triple play” business most cable and phone companies offer customers. Neither company can offer broadband or telephone service without partnering with another provider. As cord-cutting continues to take hold, customers willing to pay for increasingly expensive television packages are in decline. That likely explains Ergen’s interest in acquiring wireless spectrum — to build Dish into a broadband, television, and telephone service provider.

In May, Dish publicly bid $2.2 billion for certain spectrum assets from LightSquared. But for more than a year earlier, Ergen was quietly buying up LightSquared’s debt through holding companies and hedge funds.

Ergen created an opaque investment entity named “SP Special Opportunites, LLC” a/k/a “Sound Point” to buy LightSquared debt. Separately, Ergen asked Stephen Ketchum, a former investment banker with close ties to Ergen, to buy over $1 billion in LightSquared debt securities through Ketchum’s hedge fund. From April 2012 until May 2013, Sound Point allegedly spent $1,013,082,326.30 to purchase secured debt for Ergen’s personal benefit and without the knowledge of Dish or its board of directors. Secured debt held by creditors is paid first in a bankruptcy proceeding, and Ergen quietly because LightSquared’s largest single secured creditor.

That puts Charlie Ergen in a major ethical dilemma.

The more Dish offers to pay for LightSquared, the more money Ergen will be paid to cover the shares of LightSquared’s secure debt. Ergen has a controlling interest in Dish, which means he can order Dish to overpay for LightSquared, personally pocketing the proceeds.

Bloomberg’s Matt Levine explains the shady deal:

“An executive going around and buying up an asset for cheap, then convincing his company to buy all of that asset for a higher price – doesn’t come up a lot because it’s so obviously shady,” Levine wrote. “If you’re supposed to be devoting your time and energy to finding opportunities for your company, it looks pretty bad to steal those opportunities for yourself.”

Falcone was outraged when he learned of Ergen’s stealthy acquisitions.

Ergen

In July, Harbinger accused Ergen of “fraudulently” becoming a creditor to block efforts by LightSquared to reorganize and emerge intact from bankruptcy. Instead, Harbinger accused Ergen of seeking to acquire the company’s assets “on the cheap.” Harbinger also points to provisions in a LightSquared debt agreement that forbids certain competitors from buying the company’s debt.

Also upset are several major Dish Network shareholders who are not pleased Ergen’s private deal could make him a lot of money while costing shareholders plenty should Dish overpay for LightSquard’s assets or worse, end up with everything but the spectrum Dish covets.

At least five lawsuits have been filed since August, accusing Ergen and other board members of casting their fiduciary duties to the wind and wasting money along the way. They are also upset Ergen and his connections purchased $1 billion in LightSquared debt at a substantial discount and will likely be repaid the full face value of those debts with Dish Network’s money. That means nearly $300 million in personal profits for Ergen.

The latest shareholder lawsuit was filed by the Louisiana Municipal Police Employees’ Retirement System. It along with the suit filed by the City of Daytona Beach Police Officers’ and Firefighters’ Retirement System claim Ergen’s near-total control of Dish’s board of directors makes it impossible for the board to meet its obligation of representing shareholder interests first.

“Ergen’s control over the company and the board is highlighted by the numerous transactions he has caused Dish to enter into with members of his family,” the lawsuit states.

Ergen and Dish’s efforts to insulate themselves from charges of conflict of interest didn’t fly with many investors.

One lawsuit noted Tom Ortolf, one of the directors on the supposedly independent committee reviewing Dish’s bid, has a daughter that works at Dish; the other, George Brokaw, chose Mr. Ergen’s wife, Cantey Ergen—a Dish director named in the shareholder suit—to be the godmother of his son.

The discomfort level at Dish reached high enough to prompt one board member, Gary Howard, to suddenly resign in early September. Howard was also on the committee formed to vet the LightSquared deal because of the potential conflict of interest on Ergen’s part.

Before Falcone could claim the high road at Ergen’s expense, this week New York’s top financial regulator banned Falcone from managing Fidelity & Guaranty Life Insurance Company of New York for seven years. Harbinger Group bought Fidelity & Guaranty, the U.S. life and annuity unit of London-based Old Mutual Plc, for $350 million in 2011.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bloomberg LightSquared 9-5-13.flv[/flv]

Bloomberg News discusses the high drama between LightSquared and Dish Network. (4 minutes)

Or maybe not.

A New York hedge fund manager wants Outerwall, Inc., operator of Redbox movie kiosks, to sell, spinoff, or shutdown a streaming movie service that has failed to compete effectively with Netflix.

Redbox Instant by Verizon has proven not to be much of a threat, said JANA Partners’ co-founder Barry Rosenstein. The hedge fund controls a 13.5 percent stake in Outerwall, Inc., (formerly Coinstar) best known for its change counting machines and Redbox DVD rental kiosks.

Some analysts predict JANA Partners will attract several other shareholders disenchanted with the disappointing earnings results.

Michael Pachter, an analyst with Wedbush Securities, told his clients the group will likely force Outerwall’s management to focus on cash generation. The alternative is a forced sale of some or all of the company’s businesses.

Redbox Instant is 65% owned by Verizon, and could eventually be owned outright by the phone company or shut down. Outerwall entered the video streaming venture with Verizon to cut the company’s dependence on Redbox kiosks, which provided 87 percent of 2012 revenue (with Coinstar coin-counting kiosks and other vending machines covering much of the rest).

Netflix has de-emphasized its DVD by mail rental service in favor of a less-costly online video alternative. Redbox still depends primarily on customers visiting a nearby kiosk to exchange DVD rentals.

In September, Outerwall reported disappointing results and predicted earnings per share would be as much as 40 percent below expectation. Shares plummeted 20 percent after the earnings predictions were made.

Most of the problems are from “heightened promotional discount activity,” which translates: an excess of coupons and promo codes that attracted new customers that never spent much. Expect the company to curtail promotions and focus instead on profitability.

Also on the hedge fund’s chopping list: Seattle’s Best Coffee-branded “Rubi” coffee kiosks in grocery, drug and mass merchant stores. It seems there isn’t much interest in on-demand, fresh ground coffee selling for $1-1.50 a cup.

The company best known for the 10 daily newspapers it publishes, including the Chicago Tribune, the Orlando Sentinel, the Baltimore Sun, and the Los Angeles Times, can’t wait to get out of the newspaper business.

Last December, the Tribune Company, the second largest newspaper publisher in the country, emerged from bankruptcy without its $13 billion debt and old owners. Now in charge: the same Wall Street banks that lent the company billions to go private. Two months after assuming control, Tribune’s new owners hired Evercore Partners and J.P. Morgan to oversee the dumping of Tribune’s newspaper portfolio.

Founded in 1847 with the launch of the Chicago Tribune, 166 years later the Tribune Company was finished with print news, probably for good.

Investment bank and now owner

Today’s Tribune, controlled by Oaktree Capital Management, best known for investing in “distressed” companies, JPMorgan Chase, a Wall Street investment firm, and Angelo, Gordon & Co., a hedge fund sponsor best known for helping the U.S. government deal with the toxic assets accumulated by banks that helped trigger The Great Recession, want into the television business instead.

Tribune, which already owned 23 local television stations including flagship WGN in Chicago, bought another 19 Monday in a deal estimated to be worth at least $2.7 billion.

The stations were acquired from Local TV Holdings, itself owned and controlled by Wall Street investment firm Oak Hill Capital Partners, founded by Texas oil billionaire Robert Bass. Oak Hill acquired the television outlets from The New York Times and News Corp., in two prior deals. Tribune won’t pay for the stations outright. It is financing the deal with a $4.1 billion credit line granted by banks including JPMorgan Chase and Citigroup.

The stations involved:

Assuming the deal meets the approval of the Federal Communications Commission, Tribune will control 42 stations in 16 markets, including New York, Los Angeles, and Miami.

It expects to pay off the loans and generate returns from the “significant free cash flow” generated by the stations.

Where will that cash flow originate? From pay television subscribers asked to pay a growing amount each year for the formerly “free TV” stations.

“Smaller players feel like they’re losing their way with pay-TV providers and broadcast networks,” Craig Huber, analyst at Huber Research Partners, told USA Today. “They feel like they’re at a disadvantage here unless they size up.”

As cable programming rates continue to increase and subscribers threaten to cut the cord, pay television providers have been more willing to play hardball and kick stations off the cable or satellite dial when they cannot reach a retransmission consent agreement.

With up to 90 percent of a station’s viewership coming from pay television platforms, a lengthy standoff can destroy a station’s primary source of income: advertising revenue.

To protect themselves, television station owners are retaliating by threatening providers with the loss of all of their stations across the country, not just one or two. The resulting subscriber uproar could prove politically difficult and threaten customer relationships with providers. The more stations a company controls, the bigger the threat it can pose to Comcast, DirecTV, AT&T and other national providers.

Tribune is not alone bulking up the number of stations they own and control. Last month Gannett nearly doubled its portfolio from 23 to 43 stations with the acquisition of Belo’s TV stations for $1.5 billion in cash and agreeing to cover $715 million in accumulated debt.

Sinclair Broadcast Group, already the largest local TV station owner in the country, has gotten even larger with the purchase of four TV stations owned by Titan TV Broadcast Group. If the deal is approved, Sinclair will own 140 stations in 72 markets. In some cities, Sinclair will nominally own or control up to five local stations.

Sinclair management is well-known for injecting conservative political viewpoints into local newscasts and programming decisions. In 2004, two weeks before the presidential election, Sinclair ordered all of its television stations to air propaganda critical of Democratic candidate John Kerry. Later that year, Sinclair ordered its ABC affiliated stations not to broadcast a “Nightline” episode about soldiers killed in the Iraq war, fearing it would turn the public against the war.

But for most owners, politics has nothing to do with the desire to supersize. It’s a matter of money.

Even smaller station groups are now consolidating. Media General and New Young Broadcasting Holding, are merging their combined 30 stations.

(Image: The Wall Street Journal)

Critics worry the changing landscape of local television will threaten the concept of “local service” stations are required to provide as a condition of their broadcast license. A station owner that lives and works in the community served is becoming an increasing rarity, and the Federal Communications Commission has allowed stations that used to fiercely compete for local news viewers to now “share resources.” Many stations, especially those owned by out of area investment banks, have discontinued local news altogether in cost-savings maneuvers.

“This deal adds to a blizzard of broadcast industry consolidation that is poised to leave America’s media system less local, less diverse and less accountable to the people in these communities,” said Free Press’ Craig Aaron in a statement on the deal. “By the time all these deals are done, a handful of companies could control almost all of the network affiliates in major markets and swing states. Local broadcasts are becoming simulcasts, with the same cookie-cutter content piped in from distant corporate headquarters, once-competitive stations combined into single newsrooms and fewer journalists forced to fill more hours of airtime.”

“The FCC needs to wake up to what’s happening on local TV,” said Aaron. “Wall Street may be overjoyed at this merger mania, but the rest of us should be very worried about having fewer viewpoints on the air and fewer reporters on the beat.”

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/Former FCC commissioner Michael Copps shares his concerns about media consolidation 2013.mp4[/flv]

Former FCC commissioner Michael Copps shares his concerns about increasing media consolidation and its impact on an informed electorate. (Aired on Carolina Journal Radio May 23, 2013) (1 minute)