Some have a hangup over new phone deal
More than 600,000 Washington and Idaho Verizon Communications land-line telephone users could have a new provider soon, thanks to an $8.6 billion deal opponents say is driven by a federal income tax loophole that will protect $600 million in profits.
They warn the deal will also compromise service, once Frontier Communications takes over, and put the new owner in financial jeopardy.
Frontier Senior Vice President Steven Crosby says the alarms propagated by unions fearful of job losses are “noise” based on the disastrous experience of FairPoint Communications, which in 2007 purchased Verizon networks in New England, then bungled the integration of its system with Verizon’s.
FairPoint filed a $3.2 billion bankruptcy in October.
Verizon is selling 4.8 million U.S. land lines, including more than 500,000 in Washington and 118,000 in Idaho, many of those in the Panhandle. Residents of Pullman, Oakesdale, Newport and Republic are Verizon customers. The company is not selling its wireless business.
Because of the way the deal is structured, it will not be reviewed by the Idaho Public Utilities Commission.
The Washington Utilities and Transportation Commission staff in November recommended the deal be rejected. But last month a settlement was announced that would require Frontier to freeze rates for three years, invest $40 million in broadband upgrades and pay penalties if service standards are not met.
The commission can, and does, ignore staff recommendations. Public Counsel, the state’s consumer advocate, suggests the commissioners do just that.
Despite Verizon and Frontier assertions that the FairPoint deal and one or two others were exceptions and not the rule, Assistant Attorney General Sarah Shifley says Public Counsel’s office wants stronger financial guarantees than the settlement provides.
Crosby says Frontier is a bigger, financially stronger company than FairPoint. New revenues from the Verizon customers will more than cover additional debt costs, he says. In fact, Frontier debt ratios will improve once the deal is consummated.
The company will reduce its dividend rate, now at a fat 12.8 percent, to help assure it does not follow FairPoint into Bankruptcy Court, he notes.
Crosby says Frontier “delights” its customers.
And that tax shelter the unions say makes all this possible, and exceptionally profitable, for Verizon? It’s called a Reverse Morris Trust. Put simply, it allows Verizon to sell the land-line networks to Frontier for cash. Frontier also assumes debt associated with those assets and issues new securities to Verizon.
Verizon shareholders, not Verizon itself, will end up with 68 percent of Frontier shares. Nobody pays any tax.
This sleight of hand is allowed only if the acquiring company is smaller than the company selling the assets. The unions and some congressmen say that keeps companies larger and financially stronger than Frontier out of the bidding. Companies like FairPoint cannot service their debt, let alone invest in service upgrades. Two of those representatives, Paul Hodes of New Hampshire and Alan Mollohan of West Virginia, say they will introduce legislation to eliminate the Reverse Morris gambit.
The tax break stinks, but one tax angle or another figures in corporate deal-making every day. Public Counsel and utilities commission staff are properly focused on ironclad assurances Washington consumers get the best possible service at rates they can afford.
Delighted? Many telecom customers would settle for defused.