FairPoint seals deal; Street not sold
PORTLAND, Maine—FairPoint Communications Inc. acquired Verizon's wired telephone lines and high-speed Internet service in northern New England on Monday, and its stock plunged on the news.
FairPoint's stock dropped 10 percent at the opening bell, and traded down around 20 percent Monday afternoon before ending the day down 12 percent. Goldman Sachs analyst Jason Armstrong added FairPoint to his sell list and said the multibillion-dollar deal will push risk "materially higher."
As his company's shares tumbled, CEO Gene Johnson was in New York touting the deal, which makes the North Carolina-based phone company one of the nation's largest.
"Many dedicated employees have worked tirelessly to achieve this milestone and I am ever grateful," Johnson said. "The result of our efforts is the creation of the eighth-largest telephone company in the United States."
The $2.3 billion deal transfers about 1.6 million telephone lines and 230,000 high-speed Internet customers in Maine, New Hampshire and Vermont from Verizon Communications to North Carolina-based FairPoint.
But regulators had concerns about FairPoint's debt load. Wall Street shared those concerns.
"The market is saying there's still too much debt on the transaction," said Brad McCurtain, president of Maine Securities, which tracks companies with ties to Maine.
There are questions about whether FairPoint can boost profits when utilities rarely reach a 10 percent return on assets. "They're really biting off a huge chunk here," he said.
FairPoint ended the day down 12 percent, or $1.24, to $9.02. Verizon shares were up 2 percent, or 60 cents, to $36.45.
Not all analysts viewed FairPoint's future as bleak, though. Jonathan Chaplin of J.P. Morgan set a target price of $15 for January, suggesting a return of up to 55 percent.
The deal survived last-minute scrutiny over word that FairPoint's interest rates on bonds supporting the deal had grown.
Maine regulators learned of the change on Thursday, and scheduled a hearing on Friday. Vermont and New Hampshire held their hearings on Sunday, the day before the deal closed.
All three states ultimately signed off but New Hampshire won concessions from Verizon to help offset the increased costs of the higher bonds, estimated to be about $17 million per year for five years, said Don Kreis, general counsel for the New Hampshire Public Utilities Commission.
Verizon agreed to pay $15 million to FairPoint on the first anniversary of its ownership, and it will pay another $15 million on the second anniversary if FairPoint fails to meet certain benchmarks, Kreis said Monday.
