Verizon Will Shed Phone Lines in Deal With FairPoint (Update5)

Jan. 16 (Bloomberg) -- Verizon Communications Inc., the second-largest U.S. local telephone company, plans to shed phone lines in Maine, New Hampshire and Vermont as part of a strategy to focus on its wireless and television businesses.

Verizon will spin off the assets, which will then be bought by FairPoint Communications Inc. in a transaction worth a total of $2.72 billion, the companies said today in a statement. FairPoint shares jumped 15 percent, the biggest one-day gain since it sold shares to the public in February 2005.

Verizon shareholders will get $1.02 billion in FairPoint stock and own 60 percent of the expanded company. FairPoint's phone lines will rise from about 250,000 to 1.6 million, creating the eighth-largest U.S. telephone provider. The sale advances New York-based Verizon's plan to rely on divisions such as Verizon Wireless, where revenue grew 18 percent in the third quarter.

``These are strategically unimportant access lines for Verizon,'' said Christopher King, an analyst with Stifel Nicolaus & Co. in Baltimore who rates the shares ``hold'' and doesn't own them.

Spinning off the assets, rather than a direct sale, will keep the transaction tax-free for Verizon. The units include 234,000 high-speed Internet customers and 600,000 long-distance customers. In 2005, the operations generated about $1.2 billion in revenue, FairPoint said.

Shares of Charlotte, North Carolina-based FairPoint, with a market capitalization last week of about $650 million, gained $2.87 to $21.41 at 4 p.m. in New York Stock Exchange composite trading. Verizon fell 17 cents to $37.16. The stock rose 28 percent last year.

Growth Slows

About 3,000 Verizon employees will transfer to FairPoint under the agreement and FairPoint said it will create about 600 jobs and add service centers.

Verizon has made no secret of its intention to shed local phone lines. In 2004, President Lawrence Babbio said the company may sell or spin off as many as a quarter of its lines, citing a need to reduce reliance on ``lower-growth assets.'' Since then, Verizon's lines have declined to 46 million from 54 million, including the sale of 700,000 phone lines in Hawaii in 2005 for $1.65 billion.

The company also spun off its U.S. telephone directories business, now Idearc Inc.

Verizon is also spending about $23 billion building out its FiOS fiber-optic television network. Getting rid of debt from the phone lines may help, King said.

FairPoint will assume $1.7 billion of Verizon debt as part of the transaction. Verizon shareholders will get one FairPoint share for every 55 Verizon shares.

``We think it makes a lot of sense,'' Virginia Ruesterholz, president of Verizon Telecom, the company's landline unit, said on a conference call with reporters.

Business Customers

Annual revenue growth at Verizon was restricted to less than 6 percent 2002 through 2005 as the company struggled to overcome falling local-calling prices. Analysts anticipate that Verizon's purchase last year of MCI, the second-largest long-distance phone company, helped revenue rise to 20 percent in 2006, according to Bloomberg estimates.

Verizon Business, the company's network services unit created after the purchase of MCI Inc., will continue to sell to business customers in the three-state region.

The transaction with FairPoint includes 80,000 Verizon fiber-optic lines in New Hampshire, Ruesterholz said. Shedding the New Hampshire part of the FiOS network fits with Verizon's plans, Ruesterholz said.

Fiber Optic

FairPoint has a ``significant amount'' of fiber-optic lines in the U.S., including fiber connections to homes in Washington state, said FairPoint Chairman and Chief Executive Officer Eugene Johnson.

FairPoint plans to extend broadband service to rural areas and to communities near urban areas, Johnson said.

FairPoint will be able to save on administrative costs because of the transaction, he said.

Sales may fall to $87.3 billion in 2007, according to the estimates.

Shareholders of FairPoint will own the outstanding 40 percent of the new company. Verizon will nominate six independent directors to the board, FairPoint said.

To contact the reporter on this story: Crayton Harrison in Dallas at Tharrison5@bloomberg.net.

To contact the editor responsible for this story: Emma Moody in New York at emoody@Bloomberg.net.