Summary
It would not be good for Verizon if FairPoint goes bankrupt. The RBOC is in the process of selling off lines to Frontier and has properties in the western portion of its incumbent territory on the block. Is Verizon encouraging Windstream to be a white knight in exchange for future considerations?
Analysis
There was a lot of surprise when Windstream did not pick up Embarq. In February, we wrote: “It is very possible that Windstream has its eye on purchasing assets that are more substantial in nature.”
As far as Verizon is concerned, it does not want to see the FairPoint deal fail. There is a huge deal with Frontier that is being reviewed by numerous regulators around the country, who may start to think twice or at least place all kinds of onerous restrictions or mandates that will lead to the collapse of the sale. It would throw a huge monkey wrench into Verizon’s overall game plan in selling off even more residential properties in the future. It does not want FairPoint to become the poster child for what happens when you buy from the telco.
While the official stance from Verizon is that it has done everything it can, it would not be surprising if the carrier were encouraging Windstream to acquire the FairPoint assets – in exchange for future consideration. All of the problems would go away relatively quickly with a new parent that has a strong foundation. In exchange, Windstream would get an attractive deal that could include assets in New York, Pennsylvania, Maryland, and Virginia. It must be remembered that Verizon’s priority is to get rid of these lines, not necessarily to get a good price. Perhaps Verizon would even throw Pittsburgh into the mix. Windstream has already extended its presence in PA, with the acquisition of D&E Communications.
It is probable that Windstream will wait until FairPoint files for bankruptcy and gets its debt restructured before pulling the trigger. However, Verizon can conceivably make it worth it to Windstream to take on the debt in exchange for getting attractive territory at a song. The RBOC unloads its lines that much faster and it may look like the hero that saved the day.
Windstream knows that FairPoint will eventually get on back on its feet – given all of the advantages of an ILEC. In general, FairPoint’s network is in good shape. The big issues involve the backoffice – issuing billing and making them error-free, order completions, etc. FairPoint would be able to get the right people in there to put in the appropriate systems to handle these matters.
One of the reasons why Windstream might not wait for FairPoint to go bankrupt is that there may be more than one suitor at that point. The price could even go up significantly.
Verizon and Windstream have always had a good relationship going back to the Alltel days. For years, Alltel built its wireless infrastructure as a shadow of the Verizon Wireless network. It was always with the understanding that the latter would eventually buy the former. So, it is not inconceivable that the two companies are working together again.
Samuel Greenholtz consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
