It was a $2 billion deal that went drastically wrong, and now creditors of FairPoint Communications want Verizon Communications to pay dearly.
In a North Carolina lawsuit that describes a deceptive Verizon and a naive and stubborn FairPoint management, creditors are demanding that New York-based Verizon and related defendants disgorge the value from the sale of landline telephone operations in northern New England more than three years after FairPoint acquired the assets under an agreement that made it the eighth-largest U.S. telephone company. The deal proved disastrous for FairPoint and its stakeholders, culminating in a 2009 bankruptcy.
Verizon, the suit asserts, transferred to FairPoint a legacy, low-margin business – Northern New England Spinco Inc., or Spinco – that was shrinking more rapidly than FairPoint knew and excluded two essential components from the sale: "Internet protocol-based business products targeted at business customers" and "the IT networks and back office functions that were essential to billing customers, servicing customers, and collecting payments."
"Verizon, for itself and its short lived subsidiary, Spinco, misrepresented facts, concealed facts, blocked due diligence efforts, and stood silent when candor required speech," asserts the lawsuit, which was filed in Mecklenburg County, N.C., General Court of Justice, Superior Court Division, by a litigation trust representing creditors of FairPoint.
Before the transaction even closed, the lawsuit claims, Verizon was soliciting Spinco business customers in northern New England, offering them alternatives like wireless voice and data; meanwhile, FairPoint faced financial problems before the deal was complete, moving close to defaulting on its credit facility and finding itself unable to pay pre-closing costs estimated at $110 million, according to the suit.
The lawsuit also describes a pigheaded FairPoint management that gave "uninformed" and "wildly optimistic" revenue projections for the business in Maine, Vermont and New Hampshire and plowed ahead with the agreement despite a number of red flags alerting FairPoint executives that the business was in serious trouble.
"The natural and probable consequence of Old FairPoint's decision to go forward with the Transaction resulted in a loss of approximately a billion dollars by its creditors," the lawsuit declares. "The alternative more beneficial to creditors was for Old FairPoint to walk away. Because it didn't more creditors were left unpaid."