JANUARY 16, 2007 -- Verizon Communications Inc. (search for Verizon) and FairPoint Communications, Inc. have announced definitive agreements that will result in Verizon establishing a separate entity for its local exchange and related business assets in Maine, New Hampshire, and Vermont, spinning off that new entity to Verizon's stockholders, and merging it with and into FairPoint.
FairPoint is a telecommunications provider with 31 local exchange companies in 18 states, focused on rural and small urban markets. FairPoint provides local and long-distance voice, data, Internet, and broadband services.
Verizon's Maine, New Hampshire and Vermont, properties serve approximately 1.5 million access lines, approximately 180,000 DSL customers, and approximately 600,000 long-distance customers as of September 30, 2006.
Approximately 3,000 Verizon company employees -- those who support primarily the local phone business that is spun off -- will continue employment with FairPoint after the merger. Approximately 300 Verizon company employees in Maine, New Hampshire, and Vermont who provide national or regional support services will remain with the Verizon company that currently employs them.
Subsequent to the merger, FairPoint expects to add approximately 600 positions to the current employee base serving the three states. FairPoint will also strengthen the local operational presence and create new local service centers.
Additionally, FairPoint plans to significantly increase broadband availability in the region within the first 12 months after the merger is completed.
"Our goal at FairPoint is to respond to customers, and we will have sufficient scale to continue to offer enhanced services on a robust network platform," said Gene Johnson, chairman and CEO of FairPoint. "That means we can deliver a broader range of communications products and services."
The transaction is targeted to be completed within the next 12 months. It requires approval from FairPoint stockholders, certain state and federal regulatory approvals, and satisfaction of other customary closing conditions.
Verizon's local exchange and related business assets in Maine, New Hampshire and Vermont will be transferred to entities owned by a newly organized, wholly owned subsidiary of Verizon. This new subsidiary will incur $1.7 billion of newly issued debt and will then be spun off to Verizon's stockholders and immediately merged with and into FairPoint.
"In our view," said Virginia Ruesterholz, president of Verizon Telecom, "this agreement provides a fair value for this property and allows Verizon to focus more intently on operations in other markets. It shows how Verizon continually looks for creative and attractive ways to add value for our shareholders."
When the merger is completed, the companies conducting the Maine, New Hampshire and Vermont telephone and related business operations will be subsidiaries of FairPoint. The combined business will be managed by FairPoint's executive team.
Upon the closing of the transaction, Verizon stockholders will own approximately 60 percent of the new company, and FairPoint stockholders will own approximately 40 percent. In connection with the merger, Verizon stockholders will receive one share of FairPoint stock for approximately every 55 shares of Verizon stock held as of the record date. Both the spin-off and merger are expected to qualify as tax-free transactions, except to the extent that cash is paid to Verizon stockholders in lieu of fractional shares.
Verizon Communications will not own any shares in FairPoint after the merger.
The total value to be received by Verizon and its stockholders in exchange for these operations will be approximately $2.715 billion. Verizon stockholders will receive approximately $1.015 billion of FairPoint common stock in the merger, based upon FairPoint's recent stock price and the terms of the merger agreement. Verizon will receive $1.7 billion in value through a combination of cash distributions to Verizon and debt securities issued to Verizon prior to the spin-off. Verizon may exchange these newly issued debt securities for certain debt that was previously issued by Verizon, which would have the effect of reducing Verizon's then-outstanding debt on its balance sheet.
The transaction includes Verizon's switched and special access lines in the three states, as well as its Internet service, enterprise voice accounts, and long-distance voice and private line customer accounts (for customer private lines with beginning and ending points within the three states) that Verizon served in the region before the 2006 merger with MCI, Inc. The transaction does not include the services, offerings or assets of Verizon Wireless, Verizon Business (former MCI), Federal Network Systems LLC, Verizon Network Integration Corp., Verizon Global Networks Inc., Verizon Federal Inc. or any other Verizon businesses in these states.
FairPoint expects that the transaction will be accretive to free cash flow of FairPoint upon completion of the transition, and it expects that its current annual dividend of $1.59 per share will continue unchanged following the closing. All owners of FairPoint shares on dividend record dates after the merger is completed, including Verizon stockholders who will have received FairPoint shares in this transaction, will be eligible to receive declared dividends.
FairPoint's management anticipates that the merged company will be able to generate improved operational performance through management focus, local/regional marketing and customer service initiatives, and future development of innovative technology and processes.
Verizon was advised in the transaction by Merrill Lynch & Co. Lehman Brothers acted as FairPoint's lead financial adviser in this transaction. Deutsche Bank Securities and Morgan Stanley also acted as advisers to FairPoint.
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