In July 2006 we wrote a White Paper entitled EVOLUTIONARY CHANGE IN TELECOM: IS THE CANARY STILL ALIVE?. In it we stated:
"The net impact by 2009 is that it is conceivable that the ILECs, the “old telcos”, will have lost 50% or more of their copper access line base and that the “new telcos” will have obtained that market share and more. In addition it is possible that if the new telcos are truly “new products” as perceived by the customers, then the new telcos may totally displace the old telcos from the market in a ten year period. This is the potential down side for the old telcos. A clear anecdotal symptom of this is the example of New Hampshire. In January 2004 Verizon had 800,000 access lines, by the end of 2005 it had 400,000. That is 50% loss already in one state!"
That meant that by now anyone owning New Hampshire, and by implication Vermont and/or Maine, would be in deep trouble. I believe that I was not alone in this understanding since it was public to anyone in the states. Thus one wonders what due diligence Fairpoint did to determine a price, especially due to the size and risk of the acquisition.
In the same paper I stated:
"ILEC Financial Collapse: If the old telcos are really facing a dramatic decline in wireline customer base then there is a question as to whether they must affect significant write downs of their assets. The accounting standard requiring such write downs, called impairments, is FASB 121...and, if this is taken into account, many tens of billions of dollars must be written off immediately. If the write down is done, then many of the debt notes which the telcos have would be put in immediate jeopardy....FASB 121 This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the entity should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss is not recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset."
What was clear in this observation was that unless Verizon found a buyer for the properties they would be forced to write down the unusable assets, a significant sum for the senior management since their compensation was tied to the bottom line. Then along comes Fairpoint.
In August 2006 in a White Paper entitled FIBER TO THE HOME: CAPITAL COSTS AND THE VIABILITY OF VERIZON’S FIOS I wrote the following:
"The buy rate of telephony, by cable subscribers, will just continue to accelerate. The acceleration, in our opinion, will be massive. With the Adelphia markets now being Time Warner and Comcast operators, we estimate that they will soon dominate the voice business. This will put accelerated pressure on the FASB 121 issue and will drive up the cost of capital to Verizon."
That is there was an added problem, the accelerated growth of cable telephony especially with the entry of Comcast and Time Warner into the old Adelphia properties.
Then in December 2008 I wrote in a white paper entitled THE DEBT MARKETS, UNCERTAINTY, AND WHAT WILL FALL NEXT, THE SEVEN CRISES, the following:
"Fairpoint was a small company in North Carolina until someone came up with the smart idea to buy the Verizon properties in Vermont, New Hampshire and Maine. We have been following that market closely and it has been bleeding access lines to the cable companies and in addition is has old and outdated plant. As with Sirius, the company is at a negative net income, it had 2.5 B in debts, albeit structured via Verizon but still payable unless people play with the repayment terms again, and the market growth is negative. This debt is not repayable under the current business model, another recipe for restructuring. perhaps not liquidation.
The irony is that the Public Utility Commissions in the three states "examined" the economic viability of the deal. In my personal experience there is no competence in any of them to do such a task. This will negatively impact the people of all three states.
The following presents some details on the Fairpoint debt. There is a total of 2.5 Billion of debt due and the earnings even under the best of scenarios will not justify any possible payout of this debt, At this point there are three states whose telecommunications rely upon this now shaky firm.
These two companies, Sirius and Fairpoint, are just two of hundreds of companies each telling the same story. They have billions in high yield debt and have an earnings profile that makes any resolution of that debt highly problematic. In better markets forms of rollover of the debt would be possible but here such roll over is not possible. Moreover there companies could resolve the problem in some cases by a Chapter 11 and restructuring but in others it would result in liquidation. The classic case was Iridium in the last telecom bubble."
Thus the question is; is this just another example of the greater fool theory or did Verizon do something that was just not cricket. Clearly from our writings it was well known that the New England properties had little if any value. Thus what motivated Fairpoint to pay such a high value? The answer most likely will come out in court. Oh and yes, Verizon shareholders received shares in Fairpoint, thus the nexus for knowing was possibly transferred to Verizon as well. Let's see what the lawyers say.
"The net impact by 2009 is that it is conceivable that the ILECs, the “old telcos”, will have lost 50% or more of their copper access line base and that the “new telcos” will have obtained that market share and more. In addition it is possible that if the new telcos are truly “new products” as perceived by the customers, then the new telcos may totally displace the old telcos from the market in a ten year period. This is the potential down side for the old telcos. A clear anecdotal symptom of this is the example of New Hampshire. In January 2004 Verizon had 800,000 access lines, by the end of 2005 it had 400,000. That is 50% loss already in one state!"
That meant that by now anyone owning New Hampshire, and by implication Vermont and/or Maine, would be in deep trouble. I believe that I was not alone in this understanding since it was public to anyone in the states. Thus one wonders what due diligence Fairpoint did to determine a price, especially due to the size and risk of the acquisition.
In the same paper I stated:
"ILEC Financial Collapse: If the old telcos are really facing a dramatic decline in wireline customer base then there is a question as to whether they must affect significant write downs of their assets. The accounting standard requiring such write downs, called impairments, is FASB 121...and, if this is taken into account, many tens of billions of dollars must be written off immediately. If the write down is done, then many of the debt notes which the telcos have would be put in immediate jeopardy....FASB 121 This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the entity should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss is not recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset."
What was clear in this observation was that unless Verizon found a buyer for the properties they would be forced to write down the unusable assets, a significant sum for the senior management since their compensation was tied to the bottom line. Then along comes Fairpoint.
In August 2006 in a White Paper entitled FIBER TO THE HOME: CAPITAL COSTS AND THE VIABILITY OF VERIZON’S FIOS I wrote the following:
"The buy rate of telephony, by cable subscribers, will just continue to accelerate. The acceleration, in our opinion, will be massive. With the Adelphia markets now being Time Warner and Comcast operators, we estimate that they will soon dominate the voice business. This will put accelerated pressure on the FASB 121 issue and will drive up the cost of capital to Verizon."
That is there was an added problem, the accelerated growth of cable telephony especially with the entry of Comcast and Time Warner into the old Adelphia properties.
Then in December 2008 I wrote in a white paper entitled THE DEBT MARKETS, UNCERTAINTY, AND WHAT WILL FALL NEXT, THE SEVEN CRISES, the following:
"Fairpoint was a small company in North Carolina until someone came up with the smart idea to buy the Verizon properties in Vermont, New Hampshire and Maine. We have been following that market closely and it has been bleeding access lines to the cable companies and in addition is has old and outdated plant. As with Sirius, the company is at a negative net income, it had 2.5 B in debts, albeit structured via Verizon but still payable unless people play with the repayment terms again, and the market growth is negative. This debt is not repayable under the current business model, another recipe for restructuring. perhaps not liquidation.
The irony is that the Public Utility Commissions in the three states "examined" the economic viability of the deal. In my personal experience there is no competence in any of them to do such a task. This will negatively impact the people of all three states.
The following presents some details on the Fairpoint debt. There is a total of 2.5 Billion of debt due and the earnings even under the best of scenarios will not justify any possible payout of this debt, At this point there are three states whose telecommunications rely upon this now shaky firm.
These two companies, Sirius and Fairpoint, are just two of hundreds of companies each telling the same story. They have billions in high yield debt and have an earnings profile that makes any resolution of that debt highly problematic. In better markets forms of rollover of the debt would be possible but here such roll over is not possible. Moreover there companies could resolve the problem in some cases by a Chapter 11 and restructuring but in others it would result in liquidation. The classic case was Iridium in the last telecom bubble."
Thus the question is; is this just another example of the greater fool theory or did Verizon do something that was just not cricket. Clearly from our writings it was well known that the New England properties had little if any value. Thus what motivated Fairpoint to pay such a high value? The answer most likely will come out in court. Oh and yes, Verizon shareholders received shares in Fairpoint, thus the nexus for knowing was possibly transferred to Verizon as well. Let's see what the lawyers say.
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