In 2008 Verizon offloaded their New Hampshire, Maine and Vermont DSL and landline networks to Fairpoint Communications for $2.7 billion. The deal was a crafty and complicated one for Verizon, company lawyers using a Reverse Morris Trust
to not only offload networks they had no interest in upgrading -- but to saddle Fairpoint with $1.7 billion in Verizon debt while netting a nifty $600 million tax write off.
Verizon structured the transaction so that it could not only continue to compete with the combined entity in the relevant states after the transaction, but also so that it could crush the new competition created by the transaction.
-Fairpoint Creditor Trust Complaint
Not too surprisingly, the added debt and obligations layered on a tiny telco (whose eyes were bigger than its stomach) resulted in Fairpoint's implosion and subsequent bankruptcy
Several years later, the creditors left holding the bag are trying to recoup their losses. A trust set up to benefit creditors in the FairPoint bankruptcy case is suing Verizon Communications for $2 billion, claiming Verizon was effectively running a giant con.
According to the complaint
(pdf), Verizon not only made out like a financial bandit up front, but took advantage of regulatory delays to strip mine the assets of anything of value, including core IP network components, business services, and localized billing and support assets required to support the three states. Verizon then billed out their support assistance for millions per month during the very rocky transition, during which time 911 and other services saw repeated outages, resulting in millions more in refund penalties
So why did Fairpoint executives sign off on such a disaster? The complaint insists a "blend of naivete and optimism" and existing rocky financial footing forced Fairpoint into the deal:
By the time of the closing...Old FairPoint had become so strapped for cash that it could not even cover closing costs without help from Verizon. Old FairPoint executives, committed to taking on management responsibilities for a merger partner more than seven times its own size, while simultaneously shouldering a $2.5 billion debt, saw the writing on the wall, but believed Old FairPoint was trapped. The company had no chance given the hand it was dealt by Verizon. Old FairPoint was either insolvent or sliding over the edge into insolvency even before any money changed hands."
Verizon sent Broadband Reports a statement saying the company would contest the suit "vigorously," and that Fairpoint's problems were entirely their fault:
“FairPoint Communications’ 2008 acquisition of Verizon’s northern New England wire-line operations occurred after thorough due diligence on the part of FairPoint and its lenders and lawyers, as well as extensive review and approvals from telecommunications regulators in Maine, Vermont and New Hampshire. The claims now raised by the Litigation Trust two years after FairPoint’s bankruptcy wrongly blame Verizon for financial losses suffered by sophisticated lenders that resulted from operational, financial and other difficulties encountered by FairPoint after the closing of the acquisition, and not from actions by Verizon."
As usual, the truth is somewhere in the middle. While it's possible Fairpoint knew they'd go bankrupt and playing dumb was part of a master plan by a tiny phone company, it's more likely that small town Fairpoint was simply manipulated from beginning to end by Verizon's more sophisticated New York legal department. Meanwhile state regulators, most of whom are comfortably in Verizon's pocket, ignored repeated warnings about the deal. Amusingly, the complaint doesn't even realize Verizon's master plan: to swoop into these markets and win back most of the customers (the only part of the deal really worth anything) with fixed LTE service
Verizon did effectively con Fairpoint, but Fairpoint executives were also clearly fools to agree to such a deal without understanding it. Meanwhile, this is the third deal of this kind for Verizon (Hawaii Telcom, Fairpoint, Frontier) with more likely to come. While Verizon has made out like a bandit every time -- two of the three acquiring companies (Hawaii Telcom, Fairpoint) have been forced into bankruptcy as a result of the deals. That is, again, the fault of both Verizon and the acquiring companies, but it's also the fault of our pay-to-play regulatory system, which was more than willing to look the other way for the right price.