D-Day: Verizon dumps landline business on FairPoint

It's D-Day in New England. Today, FairPoint Communications takes over operations from Verizon for Northern New England - Maine, New Hampshire and Vermont. It's a bleak picture for ratepayers in New England.

FairPoint inherits a neglected infrastructure, inadequate build-out of even basic DSL broadband service to the customer base and Verizon's reputation for poor customer service. (Just how bad is it? While an investigation was launched in New Hampshire Verizon successfully blocked public release of the report by getting an exception to the state's Right to Know law.) Not surprisingly, Verizon has been hemorrhaging customers at an alarming rate. When the deal started, Verizon had 1.7 million land-line customers. But it has been losing accounts at a faster clip than expected. Since the $2.3 billion sale was concluded on March 31 of last year, that pace has picked up. An AP report says the company lost 65,000 residential customers, 15,000 business customers and 6,000 high-speed Internet customers just between March 31 and September 30.

FairPoint overpaid for what it got -- and took on an outrageous amount of debt to close the deal. The $270 million company, after closing the deal, now has $2.4 billion in debt and a debt to equity ratio of 11.78. Now the company must make good on its pledge to update the infrastructure, and increase its penetration of DSL, data, and IPTV video service, while managing a crushing debt load. It must overcome Verizon's poor customer service record and turn around a customer base that has been abandoning the service in droves in favor of cellular services and "triple play" offerings from cable companies like Comcast that bundle telephone, cable television and high-speed internet service.

As of now, FairPoint has no truly competitive offering and will have to invest heavily to compete.

That may be difficult. The ridiculous amount of debt the company took on would never pass muster in the financial markets today. As if to underscore that point, Fitch Ratings lowered the company's bond rating last week to junk status.

Regulators are expecting miracles. They want FairPoint to repay at least $35 million of that debt each year, make substantial capital investments in core infrastructure and broadband build-out, and cut rates by $18 million.

FairPoint is caught in a trap. The company's plan, like that of most telcos, is to increase its data business faster than its land line voice business declines. Even carriers with a healthy balance sheet that can afford to invest haven't been able to grow data services fast enough to make up for losses in their traditional businesses.

Unfortunately for FairPoint, the money it needs to upgrade and expand its service will be very expensive to get from the markets. It may have to turn to ratepayers to raise that cash through higher fees. But higher rates will only accelerate the move away from its core services.

As the poorly capitalized FairPoint struggles, the more populated areas will be cherry picked by the cable companies and cell phone operators. Unless it figures a way out of this box, FairPoint will be left with a largely rural customer base that will be lucky to get even relatively slow speed DSL service. And when it comes to broadband, rural America once again will be left behind.

FairPoint did get some concessions. Right out the gate, FairPoint gets a rebate from Verizon - a $50 million cash injection for infrastructure upgrades. And since customer defections are running higher than the caps set in the deal, it will probably get an extra $15 million in 2009 and another $15 million in 2010 from Verizon. But will those concessions be enough to fund a major investment in its core infrastructure?

And the other shoe has yet to drop: At this point no one really knows the true condition of the infrastructure that FairPoint has inherited.

Copyright © 2009 IDG Communications, Inc.

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