A major investor is urging FairPoint Communications to consider a sale. The investor’s top choice would be a FairPoint sale to CSAL – Communications Sales & Leasing, the telecom real estate investment trust (REIT) that was spun out of Windstream Communications.
The news came in the form of a letter from Maglan Capital Partners to FairPoint CEO Paul Sunu and members of the FairPoint board of directors that was shared with StreetInsider. According to the letter, Maglan Capital investment funds hold approximately 7.5% of FairPoint’s outstanding common equity – and Maglan isn’t happy with FairPoint’s market valuation.
“We believe there is a serious discrepancy between FairPoint’s improved balance-sheet, operating performance and prospects, on the one hand, and its current market valuation, on the other,” the letter says. “It is our view that this discount is directly linked to the Board’s failure to act in ways that protect and enhance shareholder value and reward shareholders for the Company’s successes.”
While pursuing a FairPoint sale to CSAL or another company, Maglan Capital also advises Windstream to pay a yearly dividend of $1.50, to institute a share repurchase program, and to retire and refinance outstanding debt.
While commending FairPoint’s success in renegotiating with unionized employees, stabilizing revenues and generating consistent cash flow, the Maglan Capital letter argues that FairPoint “is now overdue on turning its attention directly to shareholders, in ways that other wireline telecom companies do.”
Arguments for a FairPoint Sale to CSAL
According to Maglan Capital, FairPoint’s current enterprise-value is five times projected 2016 EBITDA, among the lowest in its peer group. Comparable companies are valued at six to nine times EBITDA, Maglan Capital notes.
The letter contrasts FairPoint’s current enterprise-value with the 6.4x EBITDA that Frontier Communications paid Verizon for lines in three states and with the 6.2x EBITDA Frontier paid AT&T for lines in Connecticut. (I suspect both the Verizon properties and the AT&T properties had a higher percentage of FTTH locations than FairPoint has, however – and that’s a key metric for potential acquirers.)
After noting that Consolidated Communications, Windstream Communications, Cincinnati Bell (?) and CenturyLink also could be “natural potential acquirers of FairPoint assets,” the Maglan letter goes on to argue that “[i]n particular, a merger with Communications Sales & Leasing, the only wireline REIT in the United States, is the most logical combination and would be tremendously accretive to shareholders of both companies.”
The letter notes that since CSAL’s spinoff from Windstream, the REIT’s efforts to diversify have included just one small acquisition. Acquiring FairPoint would help CSAL diversify, the letter argues.
It’s worth noting, though, that when CSAL made the small acquisition (of PEG Bandwidth) CSAL chief Kenny Gunderman said the company did not want to be overly dependent on residential broadband holdings – and residential broadband is a key portion of FairPoint’s business.
As for the proposed dividend, Maglan Capital adds that “[w]ithout paying an equity-related dividend FairPoint has alienated a large portion of the telecom investment community who specifically seek dividend-paying stocks.”
FairPoint did not immediately respond to Telecompetitor’s request for comment.