Doubts about Verizon sale lead to growing concerns about FairPoint’s shaky financial position

New Morgan Stanley research brief says FairPoint’s low cash flow won’t cover 2008 dividend

A new report by Morgan Stanley raises major concerns about the sale of Verizon’s landlines in Maine, New Hampshire and Vermont to FairPoint Communications. The Morgan Stanley analysts concluded that FairPoint "will not generate enough cash to cover its current dividend in 2008, with an increasing deficit in the years that follow.” The finding was reported in a June 5 research brief.

“We are concerned that FairPoint’s apparent expectation that it will not be able to generate enough cash to pay its current dividend without the proposed merger with Verizon’s NH, ME, and VT lines suggests that the company is in a vulnerable position,” the research brief said. “Scrutiny of telecom deals appears to be intensifying and increases the risk that FairPoint would face pressure to make concessions in order to get a deal approved.”

One near-term implication cited in the Morgan Stanley report: "Given that the company does not expect to generate enough cash to cover its current dividend on a standalone basis, we are concerned that FairPoint may be in a position where the Verizon NE lines transaction has become a necessity for the stock rather than an option."

"If the sale is approved, tens of thousands of Verizon employees, retirees and many others will become 'involuntary investors' in FairPoint," said Rich Trumka, Secretary-Treasurer of the AFL-CIO. "This report raises serious concerns about FairPoint’s financial viability after the transaction for shareholders.”

The Morgan Stanley research report also said that “if transactions such as Verizon's planned reverse Morris Trust merger with FairPoint become more difficult to accomplish, it would reduce the options available for the Bells as well as rural telecoms in an era when companies are increasingly turning to non-organic sources of growth in the telecom sector."

Verizon structured the sale using a little known part of the tax code called a “Reverse Morris Trust” that allows it to avoid paying up to $700 million in taxes on the proposed transaction.

A movement in all three states to oppose the deal has been growing because of concerns that FairPoint’s small size and fragile finances won’t allow it to provide better service or make significant upgrades in the availability of high speed Internet access.

More information about the campaign to Stop the Sale is on www.stop-the-sale.org and
www.no-deal.org