Investors ring up nice gain from FairPoint sale | Crain's Charlotte

Investors ring up nice gain from FairPoint sale

FairPoint Communications' Charlotte headquarters seems to be a likely victim of the company's pending acquisition by an industry rival. | ​Crain's Photo by Steve Cranford.

The sale of FairPoint Communications will reward handsomely the activist investors who had been pressing the management of the Charlotte company to do something to boost share value. Management accomplished that with the recent announcement of the $1.5 billion sale to Consolidated Communications.

The main actor in pushing for a sale was Maglan Capital of New York, which launched a public campaign in June to force the action. Maglan owns 2 million shares, or roughly 7.6 percent of FairPoint’s equity. The terms of the deal value the shares at $21. Maglan expects to roughly triple its investment as a result.

What Maglan and other investors reap from the sale will depend on how Consolidated performs leading up to the close of the deal, which is expected by mid-2017. That’s because FairPoint shares will be exchanged for its new owner’s shares. The better Consolidated does, the bigger the reward.

Maglan President David Tawill thinks the agreement will work out well.  

“It’s a great deal for both companies,” he says, because it will benefit Consolidated’s bottom line. Consolidated has a solid reputation for business execution and driving sales, while FairPoint has invested in its New England service territory with fiber-optic technology for telephone and broadband service. “Consolidated can take advantage of that,” Tawill says.

That view is shared by investment firm Raymond James, which raised its rating on Consolidated after the sale was announced. A research note shows it will benefit from higher earnings and reduced leverage. While FairPoint’s landline business in New England poses a threat to its results as consumers switch to cell phones, the benefits outweigh those risks, Raymond James says.

Analysts at Jeffereies LLC, the global investment firm, wrote that “the deal comes on the heels of several recent telecom mergers, emphasizing the increasing need for scale and synergies to offset legacy declines. To us, the deal makes strategic sense given challenges to FairPoint's organic turnaround and the opportunity for shareholders to participate in Consolidated's dividend.”

Cutting costs

One benefit Consolidated expects is a reduction in overhead and consolidated operations. During a call with equity analysts, Consolidated executives said they expect $55 million in savings within two years, with most of the gains in the first year.

That could mean the closing of the Charlotte headquarters of FairPoint, which has 40 employees.

“From an objective standpoint, that’s always been a question mark about the company,” Tawill says, because FairPoint’s operations and most employees are in New England.  “It wouldn’t be surprising to question it” after the acquisition, he adds.

A FairPoint spokeswoman says the integration process is just now under way, and regulatory approvals will take up to six months, so no decision has been made about the local office. Management “will be selecting the best from both companies,” she says.

Headquarters here, assets elsewhere

The Charlotte office is a legacy of FairPoint predecessor MJD Communications, which started in 1991 in New York to roll up rural telephone companies around the country. It relocated here after CEO Jack Thomas was hired a few years later.

FairPoint had phone services in markets around the county and expanded in New England after buying Verizon’s landline business in 2008 for $2.7 billion. The highly leveraged deal led to bankruptcy the next year. FairPoint emerged from Chapter 11 in 2011 and hasn’t paid a dividend since.

The lack of dividend and a low stock price prompted Maglan to press for changes such as repurchasing shares, giving it a seat on the board and establishing a committee to explore strategic alternatives, including a sale. An Aug. 17 letter to management cited a lack of response to its earlier recommendations, so it asked for the resignations of four of nine board members. Failing a shakeup of the board, Maglan wrote it would seek a special meeting of shareholders to try to vote in changes.

Asked about the influence of its pressure on the sale of FairPoint, Tawill said, “that’s water under the bridge” and declined further comment about his firm’s discussions with management. The FairPoint spokeswoman referred to the conference call for what prompted the sale, but there was no mention of pressures on management.

FairPoint CEO Paul Sunu and his counterpart at Consolidated, Bob Udell, described how the two companies had begun discussions about a combination 18 months ago. Udell said FairPoint’s investment in fiber optics made it attractive, and a recent labor agreement in New England reflected solid management. Sunu said consolidation in the industry underscores the importance of scale, and “our strategy allowed us to be active participants.”

December 9, 2016 - 4:38pm