Consolidated Buying FairPoint; Analysts Don't See High Regulatory Hurdles
Consolidated Communications plans to buy FairPoint Communications in an all-stock transaction valued at about $1.5 billion, including debt, the companies said Monday. The combining of the midsized incumbent telcos is expected to close by mid-2017, subject to standard closing conditions, including federal and state regulatory approvals, they said, noting the boards of both companies already gave unanimous approvals. Analysts told us they don't expect major regulatory obstacles.
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The deal combines telcos "with extensive fiber networks and complementary strategies focusing on being the leading business and broadband solutions provider,” said Bob Udell, Consolidated CEO, in a joint release. “This merger positions Consolidated to leverage its extensive product and services portfolio and consultative sales approach across 24 states." He said the financial benefits from the combo's "synergies and reduced leverage provide us additional operating and strategic flexibility going forward. The transaction is meaningfully accretive to free cash flow per share in the first year, strengthening the dividend payout ratio while maintaining our current dividend policy to shareholders." FairPoint CEO Paul Sunu said the deal offers the company's shareholders the benefits of "enhanced scale" and "the opportunity to benefit from the realization of synergies and the receipt of an attractive dividend going forward."
FairPoint shareholders will receive 0.73 shares of Consolidated common stock for every FairPoint common share, or a 17.3 percent premium to the 30-day average exchange ratio as of Friday, the release said. Post-deal, Consolidated shareholders will own about 71 percent of the combined company and FairPoint's about 29 percent, it said. "On a pro forma basis, the combined company generated more than $1.5 billion in revenue and $566 million in adjusted EBITDA before synergies or $621 million after synergies for the 12 months ending Sept. 30." The companies expect the deal to generate annual operating synergies of about $55 million within two years of closing.
Cowen analyst Paul Gallant expects the deal to get government approvals. "There’s no loss of competition, and there’s a good argument it strengthens competition for multi-location business customers," he said. "As always, the FCC and state regulators will look closely at post-merger financial ratios. But these metrics have been established in prior deals, so I expect this deal will conform and be approved.”
Technology Business Research analyst Chris Antlitz agreed. "I don't see any issues for this particular deal," he said, at least at the federal level, where it also needs DOJ clearance. He said state regulators could have some concerns and seek assurances the combined company will continue to make network investments. "I don't see anything major," he said. "They should be able to work through this."
Maine’s consumer office will push for thorough review of the transaction before the Maine Public Utilities Commission, the state’s Public Advocate Timothy Schneider told us. “We learned a lot about the potential for real harm to consumers the last time these assets were sold,” said the advocate, referring to the difficult transition from Verizon in 2008. Schneider said his office is still reviewing the Consolidated deal and doesn’t have an opinion on its public impact.
FairPoint has continued to receive state scrutiny in the Northeast, even though it won significant deregulation earlier this year in Maine. Maine and Vermont regulators are eyeing the company's service quality reports and reporting rules (see 1610040021). The Maine legislature earlier this year passed a law to remove the telco's provider-of-last-resort obligations in phases (see 1609130057). FairPoint recently cut 110 jobs in Maine, Vermont and New Hampshire due to landline customer losses (see 1611210040).
Consolidated/FairPoint is the latest example of telcos seeking scale and the resulting efficiencies to counter market pressures, said Antlitz, citing the recent announcements by CenturyLink and Level 3 and by Windstream and EarthLink, neither of which is expected to be blocked (see 1610280052 and 1611070032). The telcos have lots of "legacy customers" and the "decline of those businesses is accelerating," he said. “These companies are not competitive, but they are very profitable when you look at the free cash flow they can generate. ... This is really just kicking the can down the road and trying to ride that legacy business as long as they can." He predicted more telco consolidation, saying Frontier Communications was a prime candidate for further such efforts.