Proposal to merge two phone companies may face tough sledding

Opposition is building to a deal between Verizon Communications and Frontier Communications that would see Verizon selling 435,000 residential landlines in 77 counties throughout Ohio to Frontier, which serves 480 customers in a small portion of Williams County.

The Public Utilities Commission of Ohio is holding a public hearing to gather input 6 p.m. Wednesday in the Athens Community Center.

Verizon has proposed selling its landline and broadband assets in 14 states for $8.6 billion to Frontier, according to information provided by the Communications Workers of America, who oppose the deal. Verizon and Frontier agreed to the deal in May. The proposed transaction would have to be approved by the Federal Communications Commission and the state utility commissions in 10 states.

CWA said that in the deal, Frontier will give Verizon shareholders $5.3 billion in Frontier stock and give Verizon $3.3 billion in cash. The deal is structured, CWA said, to take advantage of a tax loophole so that Verizon will not have to pay any taxes on the $3.3 billion it receives.

"There are significant questions concerning Frontier's capacity successfully to operate and fund a new company that is three times its size," the CWA said in a release. "Indeed, the sale poses significant risks to consumers, workers and the economic health of our communities. These risks overwhelm any supposed benefits from the deal."

The CWA cites what they call a bad track record of Verizon with similar sales. The union noted that FairPoint Communications, the company to which Verizon sold its Maine, New Hampshire and Vermont operations in 2008, is now foundering as it tries to integrate operations, and is "choking on the debt it incurred to finance the transaction." Also, the CWA said, Hawaiian Telcom, the company to which Verizon sold its Hawaiian operations in 2005, has now filed for bankruptcy.

On Aug. 18, the Office of the Ohio Consumers' Counsel recommended that the proposed merger be rejected.

"The OCC is concerned over whether Frontier is capable of maintaining and improving Verizon's Ohio residential local telephone service if the merger is approved at the state and federal levels," the OCC said in a statement. The Consumers' Counsel represents the interests of residential utility consumers in proceedings with state and federal regulators and the courts.

When the agreement was announced in May, Verizon Chairman and Chief Executive Officer Ivan Seidenberg said in a statement that customers affected by the deal could rely on Frontier's "laser focus on the needs of rural customers."

He said that the two companies would work to "ensure ... a smooth transition" for employees affected by the transaction. Approximately 11,000 Verizon employees will switch to working for Frontier, Verizon said at the time.

Also at that time, Maggie Wilderotter, chief executive of Frontier, told the Wall Street Journal that the company is prepared for a complex integration. She said she expects cost savings of about $500 million a year from eliminating corporate and administrative overhead and other measures.

Wilderotter also told the Journal that a high priority would be making capital investments to extend high-speed Internet access to more customers. Partly because of those increased investments, Frontier will be reducing its annual dividend from $1 a share to 75 cents a share, she said.

Representatives of Verizon and Frontier could not be reached for comment by press time.

District 4 CWA representative Hetty Scofield said that she had already brought the issue before Gov. Ted Strickland when The Athens NEWS caught up with her in the offices of the Athens County Commissioners, to whom she was also expressing her concerns.

"They want to dump rural America," Scofield said. "They don't make any money on it."

She said Verizon was using what's called the "Reverse Morris Trust" tax loophole in which corporations sell off their unwanted assets without paying taxes on their gains.

"What you do is you have to pick a smaller company, and you can laden them with your debt "“ they're going to laden them with $3.3 billion in debt," Scofield said. "And then in turn you don't have to pay taxes to the state you're buying in, and you have to hold their stock, 50 percent of their stock."

The debt that Frontier will need to take on in order to pay Verizon, Scofield said, will mean less money for infrastructure, service quality and high-speed Internet build out. Frontier's debt, the CWA projected, will increase from $4.55 billion to $8 billion. The union also claims that as late as August, Frontier did not have financing for the additional debt it would take on for this transaction.