At FairPoint Communications, Labor Peace Sets Stage for Takeover

NEW YORK (The Deal) — When FairPoint Communications
finalized a deal with unions late last month, the rural telecom resolved a four-month strike and clarified its finances.

But investors still have a question for Chief Executive Paul Sunu: Is the next marker on the long road of FairPoint’s turnaround a “For Sale” sign?

Drexel Hamilton analyst Barry M. Sine suggested that FairPoint is open to a deal.

“Oh, absolutely,” he said. “Sunu was specifically brought in to fix this company up after the bankruptcy.”

Charlotte, N.C.-based FairPoint has operations in 17 states, but more than 80% of its landlines are in Maine, New Hampshire and Vermont.

FairPoint acquired the New England properties from Verizon Communications
for $2.7 billion in 2008. Integration problems hobbled the company, resulting in its bankruptcy.

Since exiting Chapter 11 in 2011, Sunu, who was hired in 2010 at the request of creditors during the telecom’s bankruptcy, has focused on improving operations, building out the network, lobbying regulators and most recently negotiating a more favorable agreement with the unions.

FairPoint could fetch $25 to $30 a share, based on recent sales and comparisons to publicly traded companies, Sine projected.

That range marks a substantial premium to FairPoint’s price of $16.45 on Tuesday, which put its market capitalization at $435 million.

Since hedge funds hold more than 50% of the company’s stock, Sine suggested that the investor base would be amenable to a sale.

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Maglan Capital holds more than 7% of the outstanding shares, and has been a shareholder since the company exited bankruptcy protection.

“This was a company that was in need of a serious operation overhaul,” said Maglan co-founder David D. Tawil of the company’s predicament after emerging from Chapter 11.

“They needed enormous upgrades on their infrastructure,” he said. “Finally, they needed to get to their cost structure, which is primarily made up of labor.”

Alongside the strike, which began Oct. 17, FairPoint had to contend with five named storms that hit New England this winter. Union workers returned to the job on Feb. 25, and the company can now shift its focus to topics such as marketing, which it reduced during the strike.

“Now that the cost structure of the company has been restructured, the company is in a position to be acquired,” Tawil said. “The only major growth that is going on in the telecom fixed wireline industry is by acquisition.”

Sunu acknowledged during the company’s March 4 earnings call that FairPoint is evaluating ways to increase value, by returning capital to shareholders or exploring mergers and acquisitions.

“It is important to note that our top priority today is operationalizing the benefits coming from the new labor agreements, but as Paul Sunu said, we are evaluating the full spectrum of alternatives to enhance shareholder value,” a FairPoint spokeswoman wrote in an email. “It is fair to say that we are [in the] very early stages of this evaluation, but we think it is appropriate to look at all things on a methodical and thoughtful basis including: Is our capital structure appropriate? Is it appropriate to return capital to shareholders to enhance value? And where do we sit in the strategic landscape?”

Sine suggested that the field of buyers could include CenturyLink
, Frontier Communications
and Windstream Holdings

The most likely candidate may be Frontier, though it is closing the $10.5 billion purchase of systems from Verizon and last year completed the acquisition of $2 billion of AT&T
operations in Connecticut.

Frontier declined to comment on its capacity for more purchases.

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The Stamford, Conn., company has systems close to FairPoint’s New England territories.

The telecom recently named Chief Operating Officer Daniel McCarthy to replace Maggie Wilderotter as chief executive. Although his background is in operations, McCarthy led the Frontier team that negotiated the Verizon deal.

Windstream is spinning off much of its network infrastructure into a real estate investment trust, which will be called Communications Sales & Leasing Inc.

A Windstream spokesman wrote in an email that the company is focused on completing the REIT spinoff.

“After the spinoff, we will have the ability to pursue M&A opportunities since the company will have less debt and more strategic flexibility,” he wrote, adding that the company will be “mindful of leverage.”

The spun-off REIT will have in-house M&A expertise. Windstream recently hired former Stephens Inc. banker Kenny Gunderman to run the REIT.

CenturyLink declined to comment.

In addition to FairPoint’s investor base, other constituents may favor a sale.

A negotiator for the International Brotherhood of Electrical Workers Local 2327 told the Bangor Daily News that the union deal would make FairPoint a more appealing takeover candidate.

“Do I believe that the company is ripe for acquisition? I do,” IBEW executive Peter McLaughlin told the paper.

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He declined to respond to requests for comments.

Sine suggested that regulators might also support a sale to a larger, more stable owner, after FairPoint’s long, slow turnaround.

Shareholders, union workers and regulators may be open to a deal. Now the challenge is to handicap the interest of potential buyers.

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