 |
 |
 |
 |
 |
 |
Frequently asked questions about the Verizon-Frontier Deal
Verizon has proposed selling its wireline, long distance and broadband assets in 14 states for $8.6 billion to Frontier Communications. Frontier will give Verizon shareholders $5.3 billion in Frontier stock and pay Verizon $3.3 billion in cash. The deal is structured to take advantage of a tax loophole so that Verizon will not have to pay any taxes on the $3.3 billion. The proposed transaction must be approved by the Federal Communications Commission and the state utility commissions in 10 states. There are significant questions concerning Frontier’s capacity to successfully operate and fund a new company that is three times its size, especially in West Virginia where new operating systems must be developed. Indeed, the sale poses significant risks to consumers, workers and the economic health of our communities. These risks overwhelm any supposed benefits from the deal. 
Verizon’s proposed sale to Frontier directly impacts the residents of Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, Sought Carolina, Washington, West Virginia and Wisconsin. However, the ability of people everywhere to communicate effectively is adversely affected when significant telecommunications providers like Frontier overreach, become financially challenged and cut back on needed services and the expansion of high-speed internet. What has happened in other places? FairPoint Communications, the company to which Verizon sold its Maine, New Hampshire and Vermont operations in 2008, is foundering as it tries to integrate operations and is choking on the debt it incurred to finance the transaction Since the deal was announced, FairPoint’s stock price has declined by about 95%, and the company has been forced to suspend dividend payments. Hawaiian Telecom, the company to which Verizon sold its Hawaii operations in 2005, filed for bankruptcy. Verizon sold its 715,000 access lines in Hawaii. Since then, Hawaiian Telcom has experienced significant transition issues that resulted in major financial and customer service problems. In three years, the company lost 21% of its customers. In December 2008, Hawaiian Telcom filed for bankruptcy. The yellow pages company that Verizon spun off also filed for bankruptcy. In November 2006, Verizon spun off its yellow pages directory business to Verizon shareholders, loading the new company, Idearc, with about $9.5 billion in debt and extracting a cool $9 billion in cash and debt reduction. Last year, interest payments alone on Idearc’s debt accounted for almost one-quarter of its total revenues! Representing something of a Verizon failing company “hat trick,” Idearc filed for bankruptcy in March 2009. 
What will the deal mean for Frontier? If the transaction is approved, Frontier management will have to deal with a 300% increase in access lines (from 2.2 million access lines now to 7 million after the sale) and a 200% increase in employees (from 5,700 employees now to 16,700 after the sale). Frontier’s debt will increase from $4.55 billion to $8 billion—an increase of over $3.4 billion. Servicing this debt will mean less money for infrastructure, service quality, and high-speed internet build out. While Frontier argues that somehow this deal will make it stronger, the issue for the states being sold is how much weaker it will make the operations in those states. The leverage ratio is one way to measure the financial health of a company. The leverage ratio is calculated by taking net debt and dividing it by earnings (before interest, taxes, depreciation and amortization). The leverage ratio for the states being sold will increase from 1.7 immediately before the transaction closes to 2.6 after the sale. The entire deal revolves around Frontier’s ability to cut its operational expenses by $500 million or 21%. This is significantly greater than the 8-10% cut that FairPoint hoped to achieve—and much of these savings were to be generated from replacing Verizon’s network and back-office systems. Yet, Frontier states that all of the operations except for West Virginia will continue on Verizon’s existing systems—for which Frontier will pay a fee. Where will Frontier generate the savings—from reduced service quality, workforce, or maintenance of the communications infrastructure? In spite of brave talk from Verizon and Frontier, as recent events have demonstrated, obtaining financing for a transaction this size can be difficult. Frontier does not currently have financing for the additional debt it will take on for this transaction. Will Frontier’s be able to provide truly high-speed Internet to its newly acquired customers? High speed broadband is now an economic necessity enabling such activities as economic development, telemedicine, e-commerce and interactive distance learning. These benefits can only be realized fully with truly high-speed internet access. Speed matters on the Internet. However, the operations that Verizon is selling are woefully lacking in slow copper based technologies such as DSL, much less high-capacity fiber networks. Fiber networks enable speeds up to 100 megabits per second (mbps) while DSL typically enables just 1.5 to 6 mbps. The Frontier transaction will not bring our states any closer to the high speeds needed to take full advantage of the telecommunications super highway. Verizon’s former Verizon FiOS customers in New Hampshire may lose their high speed internet because investment funds are being used to pay back loans, not make investments. Frontier faces significant challenges with debt and running a significantly larger company in the wake of a major recession. Where will it get the money to invest in high speed fiber? Frontier has NOT yet made any commitments to deploy the fiber needed to enable truly high-speed Internet access. 
Why is West Virginia especially vulnerable? Verizon had already committed to increase fiber investment throughout West Virginia. Given Frontier’s high debt load and potential problems with integrating West Virginia into new systems, Frontier’s ability to build high speed internet is questionable. There is a significant risk that Frontier will run into delays and cost overruns when it replaces Verizon’s operational, support and administrative systems Frontier will have to replace all of Verizon’s operational and back office systems with new systems, on the day the deal closes. This is a daunting task that led to disasters in Maine, New Hampshire, Vermont and Hawaii, which didn’t even attempt the day one cutover of operational and back office systems that Frontier says it will undertake in West Virginia. Yes. Verizon will avoid paying taxes on $3.3 billion by using a tax loophole called a Reverse Morris Trust (RMT). This is “loophole” allows businesses to reorganize and sell assets without having to pay taxes. Thus, taxpayers are subsidizing this transaction at a time when money is needed to expand broadband and expand jobs. Verizon could only obtain "tax free" treatment by selling its operations to a smaller company—no matter the consequences to consumers, workers or communities. The transaction must obtain the approval of the Federal Communications Commission and nine state regulatory agencies, including West Virginia, Illinois, Ohio, Washington, Oregon and, possibly, Pennsylvania. Source: International Brotherhood of Electrical Workers |