Cook’s Collaborative Edge

What’s wrong with this picture?

Verizon uses reverse Morris Trust accounting to sell its Northern New England properties to Fairpoint, and reap 1.7 billion in income. While Fiarpoint, a publicly traded corporation pays dividends yielding over 8.5%. It pays more than it earns in dividends and apparently can do this because its companies are rural, impoverished and receive 6 to 7 percent of their total revenues from the Universal Services Fund.

Stephen Otter Holmes commented on http://gordoncook.net/wp/?p=181

I am an ex-employee of Fairpoint’s Maine Operations. I have been involved with the Maine Public Advocate’s Office in several matters involving what we refer to as (Un)Fairpoint. I suggest anyone with an interest in the Verizon to Fairpoint sale check out the online posting of Randy Barber’s testimony to the Vermont regulators.

I followed through on Stephen suggestion. Googled and got:

State of Vermont Public Serevice Board Docket 7270 May 24 2007

Scanning through the testimony I selected the following:

FairPoint is a holding company that specializes in acquiring, operating, and selling small,primarily rural telephone companies. It currently owns 31 operating companies that provide communications services to rural and small urban communities (though it is in the process of selling one of them in Illinois). As I discuss below, FairPoint pays very high dividends, yielding over 8.5% at current share prices. Its dividend payments are significantly more than FairPoint earns, and it relies heavily on depreciation to generate the cash flows it requires to support its dividend policy and further acquisitions.

SNIP

Fundamental to its financial strategy is the utilization of “free cash flow,” derived primarily from depreciation, to pay very high dividends. FairPoint is cannibalizing itself by continually paying out more in dividends than it earns. It generates the cash to do this from depreciation - taking money that should be reinvested in its networks and, instead, paying it out to stockholders as a dividend. In its short life as a public company, FairPoint’s shareholder equity has declined by $57 million, or 21.4%, even though its net income was $60 million for the same period. That is, in the last two years, FairPoint has paid dividends equal to nearly twice its level of net income.

SNIP

The NNE [NNE refer to Verizon’s Northern New England Properties] and FairPoint businesses are rural, to be sure, but their business models are very different. Beyond the obvious difference in size (and FairPoint’s need to focus on widely scattered and extremely small subsidiaries), all of FairPoint’s subsidiaries are “rate of return” carriers and receive 6% to 7% of their revenues from the Universal Service Fund. These are very different businesses than the vastly larger and integrated NNE operations. Moreover, it is neither reasonable nor useful to compare FairPoint’s “broadband” penetration by its subsidized subsidiaries with Verizon’s current level of deployment. Also, expectations for FairPoint’s success in increasing NNE’s deployment based on FairPoint’s past experience may well be misplaced. FairPoint enjoys both operating subsidies and a guaranteed rate of return in its rural operating companies and Verizon does not.

Cook’s Edge: Tom Evslin - This is your back yard. But hey you know more about finance than I.

But to my mind it seems that Verizon has engaged in a complicated transaction that uses universal service funds to add $1.7 billion to its bottom line. According to Randy Barber’s 39 pages of testimony Fairpoints local companies are viable only because 6 to 7 % of revenues come from USF money. Approximately 4 million of 60 million comes from USF money yet nearly twice 60 million has been paid in dividends? Why should Fairpoints properties get any USF funds?

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