Verizon Communication's proposed sell-off of 4.8 million rural phone lines in 14 states to Frontier Communications will saddle the smaller telecom firm with a huge amount of debt and should be rejected by the government, two U.S. lawmakers said Thursday.
The US$8.6 billion deal, announced last May, would leave Frontier with $3.3 billion in debt while allowing Verizon to avoid paying about $600 million in taxes, U.S. Representative Paul Hodes, a New Hampshire Democrat, said during a press conference. Hodes plans to introduce legislation to close the tax "loophole" under a so-called Reverse Morris Trust transaction, in which a larger company sells off assets to a smaller company.
The deal is a "tax scam, at its base," added Ben Scott, policy director of Free Press, a media reform group. In a Reverse Morris Trust deal, the selling company can avoid paying taxes on its sold assets as long as its shareholders end up with more than 50 percent of stock of the buying company.
A representative of Verizon didn't immediately respond to requests for comments on the opposition to the deal. Verizon has said the rural lines don't fit into its strategy focused on fiber-based broadband service.
But Steve Crosby, senior vice president for regulatory and public affairs for Frontier, called opposition to the deal misguided and based on "disinformation."
"We're taking on debt, but we're taking on a ton of revenue, too," he said. "[Opponents] are trying everything to scuttle this thing."
In January 2009, Verizon sold off rural phone lines in Vermont, New Hampshire and Maine to FairPoint Communications in a similar deal. FairPoint then filed for bankruptcy in October. Hawaii Telcom Communications, which took control of Verizon's Hawaiian lines in 2005, filed for bankruptcy in 2008.
A Reverse Morris Trust deal with FairPoint should be an "ominous" sign for regulators looking at the Frontier deal, said U.S. Representative Alan Mollohan, a West Virginia Democrat. Frontier will have to cut thousands of jobs, and Verizon will walk away with a tax break, he said.
"I'd prefer to see that funding go to extend broadband in West Virginia," Mollohan said. "This [deal] is not in the best interest of our state."
Frontier now owns about 144,000 phone lines in West Virginia. If the deal goes through, it would own more than 760,000 phone lines, making it the dominant telecom provider in the state. The problem, said Mollohan and other critics, is that Frontier will inherit an outdated telecom network, and it's unlikely to have the money to upgrade to faster broadband service.
In the deal, Frontier would gain hundreds of thousands of lines in several other states, including Indiana, Illinois, Ohio, Michigan, Wisconsin, Oregon and Washington.
With Frontier $3.3 billion in debt, upgrading the networks to bring higher-speed broadband service to rural areas will not be a high priority, said Larry Cohen, president of Communications Workers of America. With Reverse Morris Trust deals, "you're getting companies that are taking on enormous debt," he said.
The CWA has organized a Sunday rally in Charleston, West Virginia, for people opposed to the deal. The U.S. Department of Justice and U.S. Federal Trade Commission have not opposed the deal, but the U.S. Federal Communications Commission is still looking at it.
Frontier will be focused on broadband service with its new customers, Crosby countered. About 92 percent of Frontier's current customers have access to broadband, making it a U.S. leader in broadband availability, he said.
Reverse Morris Trust deals have been around for more than a decade and are a good tool to save shareholders from paying taxes on sales of assets, he added.