FairPoint Eats Up the Countryside

Proof that life remains in the telecom market -- albeit out in the countryside -- has hit the wires again today, as FairPoint Communications Inc., a rural local exchange carrier (RLEC) operating in Maine, announced an unsolicited bid for Community Service Communications Inc., an incumbent local exchange carrier (ILEC) in the same neck of the woods (see FairPoint Acquires Rural Telco).

FairPoint will pay $31.1 million for all of the assets and operations of Community Service Telephone Co. (CST), a wholly owned subsidiary of Community Service Communications based in Winthrop, Maine. In addition to the purchase price, FairPoint is also willing to pay a breakup fee of just over $1 million to Country Road Communications which also had an offer on the table [ed. note: along with a steaming hot cinnamon apple crisp?].

”FairPoint is offering us $2.65 million more than Country Road and is a bigger company… This deal is better for our shareholders,” says Tim Henry, a spokesman for FairPoint.

FairPoint is one of a gaggle of growing regional carriers that are quietly snapping up pieces of the rural market, as detailed in this month's Light Reading Insider, Light Reading's paid subscription research service, formerly known as Optical Oracle (see Rural Telcos: The Steady Hand). Since it was founded in 1991, FairPoint has created a business out of acquiring RLECs. It now owns 29 in 18 states. In New England, it operates six that service more than 59,000 customers. Community Service Telephone is adjacent to its Maine companies and became an obvious target. “When Country Road made an offer, it was time for us to pull the trigger,” says Henry.

Interestingly, CST’s business has been a hot ticket down East since the company engaged investment bankers last fall. “Over 30 companies have looked at us,” says William Ralph, spokesman for Community Service Communications. He wasn’t at liberty to disclose names, but the largest providers in the area include Country Road, Verizon Communications Inc. (NYSE: VZ), Telephone & Data Systems (TDS), Oxford Networks, and Coastal Telecommunications.

CST provides voice and data services to roughly 12,000 residential and business customers in 16 towns near Augusta and Lewiston/Auburn. So why is it selling, you ask? It’s over a hundred years old and one would think it would have plenty of loyal customers.

Not exactly. “We are getting more competition from cellular services… U.S. Cellular Corp. in particular, which is run by TDS [Telephone Data Services],” CST’s Ralph says. He explains that regular vacationers to Maine are switching to using a cell phone while on holiday, instead of renting a fixed line in their summer home, as it is easier to manage.

Wall Street analysts say the deal is right in line with FairPoint’s strategy to date. “It builds on their base in New England and is a growing part of the market,” says Dimitri Triantafyllides!, telecom analyst at Wachovia Securities Inc.

He notes that RLECs like FairPoint have been pretty much sheltered from the telecom crash of the last couple of years. A favorable regulatory environment and various funds available to rural providers have cushioned them from the downturn, he says, and this has afforded them the ability to increase their revenues and expand.

“Since the Telecom Act of 1996 these operators were technically opened to competition, but because they have small populations and a very small business mix of lines to total lines, it’s not an attractive market to get into as a newcomer,” says Triantafyllides. This has created regional monopolies, like FairPoint. In addition, the Universal Service Fund helps the RLECs recoup the costs of provisioning a service that is not immediately profitable.

CST’s 50 employees will stay on board at FairPoint, expanding the acquirer's headcount to 850. CST's management team is expected to depart. “It’s part of the game, FairPoint doesn’t need any help running the company,” says Ralph.

— Jo Maitland, Senior Editor, Boardwatch

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