Download - GTCR Deck Final
Fall 2015 GTCR ProjectFairPoint Communications ProposalDecember 1st, 2015
2
Introducing the Team
Project Analysts
Project Leaders
Daniel Lipka SeniorFinance & Economics
Kevin RajputSeniorFinance
Janne FussFreshman IT Management
Chris GauchJunior Finance & Economics
Chase GrableSophomoreFinance & Spanish
Charliepat HartFreshmanFinance
Bryan LimFreshmanFinance
Philip RimFreshmanEconomics
Jake SextonJuniorFinance
Michael RomanoFreshman Finance
3
Table of Contents▪ Opening Section
▪ Introducing the Team▪ Table of Contents▪ Executive Summary
▪ Industry Overviews▪ Wired Telecommunications▪ Porter’s 5 Forces▪ Wireless Telecommunications
▪ Company Overview ▪ Company Overview▪ Recent Stock Chart▪ Executive Management▪ Recent Quarter Performance▪ Markets
▪ Operating Performance▪ SWOT Analysis▪ Asset Management▪ Margins & Profitability▪ Growth & CapEx
▪ Valuation▪ Comparable Companies▪ Precedent Transactions▪ Discounted Cash Flow Model▪ Sources and Uses / Capitalization Table ▪ Leveraged Buyout Model ▪ Considerations / Business Risks ▪ Final Recommendation
▪ Appendix
4
• Transaction value of $1,489.6mm• Financed by $1,050mm term loan B at L+450• 20% premium creating an offer price of $21.97 per share• IRR of 6.31% and MOIC of 1.36x• Sponsor equity check of 33.0%
Current Working Executive SummaryCompany Overview
Industry Profile
Competitors
Investment Recommendation
• Leading provider of advanced communication services to business, wholesale and residential customers
• Services include Ethernet, high capacity data transport and other IP based services, in addition to Internet access, high-speed data and local and long distance voice services
• Territories span 17 states with 1.1 million access line equivalents and 322k broadband subscribers
• Wired Telecom industry provides local and long distance voice communication services
• Major products/services: fixed local telephony, fixed long-distance telephony, wholesale network access and Internet access
• Mature industry with low revenue volatility• Medium concentration with high barriers to entry• Revenue expected to decline through 2021
• Leveraged buyout transaction not recommended• Declining industry with limited growth opportunities• Heavy capital expenditure needs and downsizing necessary• Company has been reducing capex because of lack of cash flow
• Unable to obtain information on operating margin by segment
Transaction Summary
5
INDUSTRY OVERVIEWS
6
Wired Telecom Industry Overview
Key Drivers
Overview• Companies in this industry provide both local and
long distance voice communications services via the public switched telephone network
• Mature industry facing continuing shift from consumer demand toward wireless products• 50% of adults aged 18-34 live in households
with only wireless phones• Voice over Internet Protocol (VoIP) is also a
significant threat to traditional wired telephony• Offers greater mobility at a cheaper price
with minimal regulation• Carriers will focus on wireless business, hurting
wired industry revenue and decreasing its significance
Carrier’s Major Products/Services• Mobile Internet Connections:
• Wireless telecom carriers are largest threat to wired industry; number of mobile internet connections is expected to increase in 2015
• Number of Broadband Connections:• Demand for wired broadband connections has
increased significantly, partially offsetting the decreasing demand for wired voice telephony
• Number of Cable TV subscribers:• Cable providers compete with wired
telephony providers through VoIP services, and bundle these services with cable TV and internet services
Verizon: 22.2%CenturyLink:4.
1%
Other: 39.8%
AT&T: 33.9%
The wired telecom industry is a very mature industry facing significant negative headwinds
44%
20%
13%
10%
14%Internet AccessFixed Local TelephonyWholesale Network AccessFixed Long-Distance TelephonyOther
Source: IBISWorld
Market Segmentation
7Source: IBISWorld
Wired Telecom Industry Overview
• Demand for industry’s core product is declining • Substitutes like wireless and VoIP are
depleting demand for the wired voice telephony
• Licensing from FCC required • Network infrastructure and service equipment • Capital-intensive• Large infrastructure needed• Market for traditional wired voice telephony is
declining at a rapid pace • Rapid change of substitute technology
Barriers to EntryIndustry Life Cycle• Mature and stable stage
• Bordering on technological decline• More efficient means of communication are
surpassing the wired telecom industry • Demand for internet access has surpassed
demand for wired telephony• Bundling of services
• Internet, Video & Voice• Shift in investments from voice services to
high-bandwidth fiber-optic networks • Economies of scale pushing smaller firms into
buyouts or bankruptcy
Internet and Broadband Connections Industry Revenue 2005-21
2005 2007 2009 2011 2013 2015 2017 20190
100
200
300
400
500 Mobile Internet Broadband
(in m
m)
2005
2007
2009
2011
2013
2015
2017
2019
2021
150,000
160,000
170,000
180,000
190,000
200,000
(in
$mm
)
The wired telecom industry is a mature, but declining industry that is expected to become more obsolete with the rise of wireless and satellite
capabilities
Projected
Financial Crisis
Projected
8
Porter’s Five Forces: Wired Telecom
Industry RivalryModerate
- Significant barriers to entry → No new entrants- Decreasing demand for services → More competition- Demand for access lines and traditional voice services are decreasing → more focus on wireless business- Price is critical → consumers cannot differentiate amongst products
Bargaining Power of Suppliers
Moderate- Decreasing demand for wired telephony products entails more competition for telecom equipment- As revenues decline, there will be less need for wired telecom equipment from suppliers
Threat of Substitutes
High- Wireless technology services and voice over internet protocol → lower costs and higher mobility- Technological innovation → more efficient means of transferring data
Bargaining Power of Buyers
High- Low company concentration → many options- Buyer preferences extremely important → high threat of substitutes
Threat of New Entrants
Low- Large upfront expenditures- Demand for industry's main product is decreasing- Copper wire technology is not sufficient for high-bandwidth data needs
Source: IBISWorld
9Source: IBISWorld
Wireless Industry OverviewFinancial Performance as of March
2015• Revenue: $248.7 bn• Profit: $62.7 bn• Annual Growth 10-15: 2.8%• Projected Growth 15-20: 2.2%• Market segmented into Consumer, Small Business
and Corporate Clients
74% 17% 9%Consumer & Residential Clients Small & Medium Businesses
Wireless Industry Revenue 2003-21 ($mm)
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
$100,000
$150,000
$200,000
$250,000
$300,000 Projected
Revenue by Sector
52.2%18.0%
16.7%
5.6%
0.5%
7.0% Cellular Voice ServicesAdvanced PCS ServicesText Messaging ServicesOther Data ServicesPagingOther
Overview• Companies in this industry provide cellular mobile
phone services, paging services, wireless internet access and wireless video services
• Mature industry benefiting from the rapid development of mobile devices and popularity of smartphones• Two-thirds of US consumers own
smartphones• Long Term Evolution (LTE) is the preferred 4G
technology, and is expected to enable a more rapid transition by consumers to 4G devices• Expansion of data services as tablet
computers and e-readers achieve wider penetration
• Carriers will focus on 4G networks, encouraging more customers to abandon landlines altogether
Financial Crisis
10
COMPANY OVERVIEW
85%
15%
Maine, New Hamp-shire, and VermontOther
11Source: 10-K, Wells Fargo, Yahoo Finance, CapIQ
FairPoint Company Overview
FairPoint Key Statistics
FairPoint Communications Products
Operating Geography
• Ticker: FRP (NASDAQ)• Founded: 1991• 3,052 employees• Communication Services Sector: Voice services to
residential, wholesale and business customers• Provides Broadband Internet service, local
wireline, and cable service to customers• Operates in 17 states with rural focus• 1.1 million access lines & over 16,000 miles of
fiber
85% of access lines are in Northeast U.S.
Data and
Internet
Main revenue driver
Voice Services
Local calling,
long distance
Access Services
Network transpor
t, Interstate Access
Other Services
Directory, video,
etc.
Emerged from Chapter 11 bankruptcy on January 24, 2011
HQ
Metric As of Nov 23rd, 2015Market Capitalization $493mm
Enterprise Value $1,360mm
Rating B2 / B
EV / Revenue 1.97x
EV / EBITDA 4.74x
Beta 0.50
Revenue (LTM) $867mm
EBITDA (LTM) $291mm
1/25/11
4/25/11
7/25/11
10/25/11
1/25/12
4/25/12
7/25/12
10/25/12
1/25/13
4/25/13
7/25/13
10/25/13
1/25/14
4/25/14
7/25/14
10/25/14
1/25/15
4/25/15
7/25/15
10/25/15$0
$5
$10
$15
$20
$25
$30
Bankruptcy: FRP emerges from bankruptcy related to 2009 and financial crisis
Quarterly Filing:FRP reports weak Q4
12Source: CapIQ
Annotated Stock Chart
Despite bankruptcy, price has been rebounding since the inception of Paul Sunu’s tenure
Executive/Board Changes: Patrick Murphy appointed as senior director of competitive local exchange carrier business development
Quarterly Filing: FRP reports weak Q1
Quarterly Filing: FRP reports weak Q2
Investor Activism: Maglan Capital provides positive reviews on FRP performancesDivestiture: divested pay
telephone operations
Downsizing/ Discontinued Operations: Closed operations and cut headcount
Divestiture: Idaho operations
Strike: Northern New England strike due to frozen pensions
13
Executive Management Team
Source: Fierce Telecom, Company Website
FairPoint Communications Leadership Team
Takeover Analysis – Management Perspective
Paul H. Sunu, Chief Executive Officer•Named CEO in August 2010; compensated at $1.24mm FY 2014•Formerly CFO of Hargray Communications Group, Inc., Hawaiian Telecom and Madison river Communications
•Over 20 years of operational experience
Ajay Sabherwal, Chief Financial Officer•Joined FairPoint in July 2010; compensated at $0.52mm FY 2014•Served as CFO for Aventine Renewable Energy and Mendel Biotechnology and Choice One Communications
•Began his telecom career in 1989 in Canada with CNCP Telecommunications
John Lunny, Chief Technology Officer• Joined FairPoint in 2008 and moved to his current role in 2013•Prior to joining FairPoint, served as senior director of service delivery at Comcast Business Services
•More than 25 years of network operations, engineering and service delivery experience in the communications industry
•"Understanding the reality of a consolidating industry, intense competition and secular headwinds, we must consider mergers and acquisition as either seller or buyer as our overall strategy," Sunu said during FairPoint’s first-quarter earnings call.
•"We would consider whether or not our operating platform should be something to scale up or would be available as adding scale to somebody else," Sunu said during second earnings call. "So all of this is available to us and we have the ability to do some acquisitions under our current credit agreement, obviously that comes into play and the macro environment in terms of what's going on also affects us."
14
Recent Quarter PerformanceRevenue Decline by SegmentRevenue Decline
Key DriversQ3 2015 vs. Q3 2014
As compared to Q3 2014, Total Revenues declined $6.5M, Adj. EBITDA increased $5.0M, Operating Income increased $101.3M, and EPS increased from ($1.43) to
$1.97
• Leveraging outstanding operating platform• Historically low trouble loads• Completing more jobs per day
• Positive momentum in Ethernet and growth in broadband
• Ethernet services contributed approximately $24.8M of revenue in Q3 2015 as compared to $20.7M a year ago, an increase of 19.8% YoY
• Ethernet revenue was 11.2% of total revenue in Q3 2015 compared to 9.1% of total revenue in Q3 2014
• Total Ethernet revenue circuits grew by 21.0% YoY• Accepted $37.4mm in annual funding from the
FCC’s Connect America Fund in August
2011 2012 2013 2014$0
$100,000
$200,000
$300,000
$400,000
$500,000
Voice servicesAccessData and Internet servicesOther
3Q 2015 3Q 2014Revenue $221,569 $228,120Operating Expenses 149,140 257,042Loss from Operations 72,429 (28,922) Net Income 53,054 (49,027)
Assets $1,358,151 $1,488,499Long-Term Debt 900,634 909,048Equity 25,403 (395,737)
Operating Cash Flow $37,855 $23,295
Voice services: declined $10.2 million due to the loss of voice access lines versus a year ago combined with lower long distance usageAccess: declined $4.8 million due to the continued loss and conversion of legacy transport circuits to next generation fiber-based servicesData and Internet services: increased $1.2 million reflecting strength in retail Ethernet services and the mitigating impact of speed upgrades and price increases on residential broadband products offsetting subscriber declinesRegulatory funding: grew $6.5 million due to our acceptance of CAF Phase II and the corresponding transitional revenue of $7.0 million associated with that program
Source: FairPoint 10k
15
Markets
36%
29%
21%
4%3%
3% 5%
MaineNew HampshireVermontFloridaNew YorkWashingtonOther States
• Majority of LECs operate as the incumbent local exchange carrier in each market in addition to broadband subscribers
• Concentrated in Northeast• Primarily serving small Urban and rural
markets• Access Line Equivalents of all types declining
except for broadband subscribers• Other states includes: Missouri, Ohio, Virginia,
Kansas, Pennsylvania, Illinois, Oklahoma, Colorado, Massachusetts, Georgia and Alabama.• Listed in order of number of access line
equivalents
Access Line EquivalentsAccess Line Equivalents by State
Access Line Equivalents by State
2011 2012 2013 2014 -
200,000
400,000
600,000
800,000
1,000,000
ResidentialBusinessWholesaleTotal Voice LinesBroadband subscribers
Source: FairPoint 10k
16
OPERATING PERFORMANCE
17
0.366 0.301 0.1340.1340.065
Verizon AT&TDeutsche Telekom Sprint NextelOther
Source: 10-K, Jefferies, Citibank, Raymond James, IBISWorld
SWOT Analysis
Threats
Strengths Weaknesses
Opportunities• Over 50% of its homes are capable of 100+
mbps broadband speeds, but only 22% of homes are subscribed to 20+ mbps
• Improved labor agreements implies costs savings
• Investment in fiber optics implies high margins
• $700+ million invested in infrastructure and future technologies
• Great presence in northern New England• Capacity to provide Ethernet services to 90% of
northern New England residents• Invested in 16,000 miles of fiber line• Solid rural presence, which entails high margin
business opportunities
• Slowing broadband sales in telecom sector• Increasing rates of wireless substitution• Greater level of triple-play service competition
from cable MSOs within its markets• Shift in regulation could reduce substantial
proportion of revenue• Comcast Business deepening presence in
northern New England markets
2008 2009 2010 2011 2012 2013 201402468
101214
• Small national presence → 90% of business is in northern New England
• Consistently declining annual revenues• Small market share of only 20% in enterprise
and 30% in consumer sector• History of bankruptcy in 2011• Past labor strike → disconnect between
management and workers
Average US Internet Speed (Mbps)
Telecom Market Share
18Source: CapIQ
Asset Management
2010 2011 2012 2013 20140.0x0.1x0.2x0.3x0.4x0.5x0.6x0.7x0.8x
Total Asset Turnover Fixed Asset Turnover
2010 2011 2012 2013 20140
50100150200250300350
Depreciation & Amort.Capital Expenditure
$mm
Asset Turnover D&A and Capital Expenditures
Low cash balances and weak cash flows are causing reduced capital expenditures
• Asset turnover has experienced an increase over the past five years, as FairPoint has divested itself of relatively inefficient fixed assets
• PPE in 2010 and 2011: $6,274.60mm and $1,943.60mm• PPE CAGR from 2011 to 2014: 4.3%
• Total asset and fixed asset turnover follow the same trend because PPE has consistently remained the largest component of total assets
• Reduction in capex has lead to decrease in D&A
• Capital expenditures are expected to decline in the future, further reducing depreciation and amortization
• Cash from 2010 to 2014: $105mm, $17mm, $23mm, $43mm, $38mm
• Cash flow from operations: $192mm in 2010 and $121mm in 2014; CAGR: -8.8%
• 2015 capital expenditure guidance set at $110-115mm
• Future capex at 13% of revenue
19Source: CapIQ
Margins & ProfitabilityMargins Return on Assets
The company is struggling to control its costs, as the operating costs push margins down significantly and result in negative EBIT and net income historically
2010 2011 2012 2013 2014
(10.0%) (8.0%) (6.0%) (4.0%) (2.0%)
0.0% 2.0% 4.0% 6.0% 8.0%
10.0%
2010 2011 2012 2013 2014
(30.0%) (20.0%) (10.0%)
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
Gross Margin % EBITDA Margin % EBIT Margin % Net Profit Margin %
• Depreciation and amortization expense grew from 2010 to 2012 and fell from 2012 to 2014• EBIT margin follows this trend
• Positive net income in 2011 mainly due to a reorganization following bankruptcy• Primarily positive because of the debt
cancelation’s positive value• In all 5 years, operating cost exceeds gross
profit
• $897.5mm abnormal gain in 2011 during bankruptcy reorganization process because large amount of debt was cancelled
• Negative net profit margins have resulted in negative return on assets
• Net profit margin in 2010 to 2014: -26.3%, 16.7%, 15.7%, 9.9%, and -15.1%
20
2011 Q3
2012 Q3
2013 Q3
2014 Q3
2015
20002200240026002800300032003400360038004000Employees
NNE Telecom Group
Source: FairPoint 10K, Investor Presentations
Growth and Capex
Capex Trend and Allocation
Northern New England• Incumbent wireline provider with extensive
“enterprise class” network and scale in three contiguous states of ME, NH and VT
• Over 1,800 Fiber-to-the-tower (FTTT) Ethernet backhaul connections
• 32 markets with access to Ethernet connections capable of symmetrical, dedicated data transport speeds of up to 1Gig
• Low market share of residential/business customers
• ~90% broadband availability; 37.1% penetration
• 629,253 total switched access lines
• Everywhere except Northern New England• Consistent, substantial cash flow generation• Local presence and workforce; less
competition• ~90% broadband availability; 60.1%
penetration• 222,489 total switched access lines
Telecom Group
Headcount Rationalization
2010
2011
2012
2013
2014
2015
Guid
ance
$100
$130
$160
$190Regular Regulatory FTTT
• Capex projected to increase at 13.3% of revenue starting in 2015
21
VALUATION
22Source: CapIQ
Comparable CompaniesLTM NTM LTM NTM LTM NTM
CNSL Consolidated Communications $21.57 $1,091 $2,491 3.22x 3.22x 9.19x 7.85x NM 33.44xCTL CenturyLink 27.31 14,949 35,008 1.96x 1.98x 5.24x 5.17x 21.02x 11.26xFTR Frontier Communications 4.96 5,748 20,123 3.84x 3.81x 9.42x 7.60x NM NMWIN Windstream Holdings 6.00 605 11,421 1.98x 2.03x 5.99x 7.95x NM NMCBB Cincinnati Bell 3.74 803.8 2156.5 1.66x 1.82x 6.72x 7.34x 3.89x 44.52x
75th Percentile 21.57 5,748 20,123 3.2x 3.2x 9.2x 7.9x 16.7x 39.0xMean 12.72 4,639 14,240 2.5x 2.6x 7.3x 7.2x 12.5x 29.7xMedian 6.00 1,091 11,421 2.0x 2.0x 6.7x 7.6x 12.5x 33.4x25th Percentile 4.96 804 2,491 2.0x 2.0x 6.0x 7.3x 8.2x 22.4x
FRP FairPoint Communications $17.85 $466 $1,362 1.97x 1.63x 4.74x 5.56x 105.93x 3.70x
Implied LMT EV (mean) $2,195 $2,218 $2,125 $1,879 $952 $1,030Implied LMT (median) $1,716 $1,751 $1,953 $1,989 $952 $1,047
Implied LMT Market Cap (mean) $1,298 $1,322 $1,229 $983 $56 $134Implied LMT Market Cap (median) $820 $855 $1,057 $1,092 $56 $150
Margins1 Year 2 Year 1 Year 2 Year EBITDA
CNSL Consolidated Communications $774 $778 $271 $320 22.4% -0.8% 26.9% -2.1% 35.0%CTL CenturyLink 17,862 17,843 6,663 6,854 -1.0% -0.6% -0.8% -1.8% 37.3%FTR Frontier Communications 5,494 5,556 2,280 2,300 16.4% 15.3% 9.5% 14.5% 41.5%WIN Windstream Holdings 5,781 5,769 1,907 1,611 -1.0% -2.9% -18.2% -10.7% 33.0%CBB Cincinnati Bell 1,290 1,153 328 293 -9.8% 2.5% -17.7% 2.1% 25.4%
FRP FairPoint Communications $867 $862 $291 $262 -4.3% -3.3% 121.5% -5.5% 33.5%
EV/EBITDA Price/EarningsTicker Company Name
Latest Close Price
Market Cap
(USDmm)Enterprise
Value (USDmm)EV/Revenue
Ticker Company Name LTM Revenue 2015E Revenue LTM EBITDA 2015E
EBITDAExp. Revenue Growth Exp. EBITDA Growth
23Source: CapIQ
Precedent Transactions
Target/ Issuer Buyers/ Investors Type Close Date Transaction Value EV Equity ValueM2 Group Ltd Vocus Communications Limited Strategic 9/ 28/ 2015 $1,749.88 $1,702 $196
NTELOS Holding Corp. Shenandoah Telecommunications Co. Strategic 8/ 10/ 2015 730.13 618 358Lumos Networks Corp. Pamplona Capital Management, Llc Sponsor 8/ 5/ 2015 140.00 633 128
General Communication Inc. Searchlight Capital Partners Sponsor 12/ 4/ 2014 75.00 2,199 111Partner Communications Company Ltd. Surwest Corporation Strategic 3/ 18/ 2014 41.81 1,451 1,074
Transaction Summary Transaction Values
EV/ Rev EV/ EBITDA EV/ EBIT1.53 10.34 11.391.36 5.90 14.203.12 7.57 17.442.45 7.38 16.690.32 1.49 3.57
Valuation
LTM Rev LTM Net Income 5 Year CAGR Rev$1,116 $74 21.6%
454 1,116 2.0%1,116 11 9.8%896 (27) 8.8%
4,519 49 -9.3%
Operating Statistics
Target/ Issuer Buyers/ Investors Type Close DateM2 Group Ltd Vocus Communications Limited Strategic 9/ 28/ 2015
NTELOS Holding Corp. Shenandoah Telecommunications Co. Strategic 8/ 10/ 2015Lumos Networks Corp. Pamplona Capital Management, Llc Sponsor 8/ 5/ 2015
General Communication Inc. Searchlight Capital Partners Sponsor 12/ 4/ 2014Partner Communications Company Ltd. Surwest Corporation Strategic 3/ 18/ 2014
Transaction Summary
Target/ Issuer Buyers/ Investors Type Close DateM2 Group Ltd Vocus Communications Limited Strategic 9/ 28/ 2015
NTELOS Holding Corp. Shenandoah Telecommunications Co. Strategic 8/ 10/ 2015Lumos Networks Corp. Pamplona Capital Management, Llc Sponsor 8/ 5/ 2015
General Communication Inc. Searchlight Capital Partners Sponsor 12/ 4/ 2014Partner Communications Company Ltd. Surwest Corporation Strategic 3/ 18/ 2014
Transaction Summary
24Source: CapIQ, Wells Fargo, Jefferies
Discounted Cash Flow ModelUSD (Millions)
Assumes transaction close of 12/31/2015 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020ERevenue $973.65 $939.35 $901.40 $855.78 $818.02 $791.17 $765.74 $744.17 $726.31(1) Voice Services 446 405 376 337 304 277 252 229 209(2) Access 336 322 300 294 273 260 247 234 223(3) Data and Internet Services 143 161 175 178 183 195 209 223 239(4) Other 49 51 50 47 57 60 59 57 56
Net Income (153.29) (93.45) (136.32) 76.31 158.37 (43.35) (44.37) (45.23) (45.95)Plus: Interest Expense 68 79 80 78 79 75 75 75 75Plus: Depreciation and amoritzation 377 282 221 223 214 206 199 193 189Plus: Other adjustments (14) (3) 126 (124) (206) 0 0 0 0Adj. EBITDA 277.41 265.03 290.57 253.34 245.41 237.35 229.72 223.25 217.89Less: Pension Contributions (18) (20) (28) (28) (28) (28) (28) (28) (28)Less: OPEB Contributions (3) (3) (6) (6) (6) (6) (6) (6) (6)Less: Capital Expenditures (145) (128) (119) (113) (110) (103) (100) (97) (94)Unlevered Free Cash Flow 111.4 113.3 137.0 105.9 101.4 100.5 96.2 92.5 89.5Discount Factor 0.97 0.91 0.85 0.79 0.74Discounted Free Cash Flow $98.10 $91.00 $81.50 $73.37 $66.42
DCF Analysis Details Terminal Value CalculationDate 11/ 19/2015 Exit MultipleWACC 6.85% 2020E EBITDA 217.9$ Terminal Value Method Exit Multiple Exit Multiple 6.0xImplied Equity Calculation Terminal Value 1,307.4$ Present Value of Projection Period 410.4$ Present Value 970.5$ Present Value of Terminal Value 970.5$ % of TEV 70%Implied Enterprise Value 1,380.9$ 17.95$ 5.0x 5.5x 6.0x 6.5x 7.0xLess: 2015 Debt 913.3$ 4.85% 15.30$ 18.56$ 21.82$ 25.08$ 28.34$ Plus: 2015 Cash 17.0$ 5.85% 13.59$ 16.71$ 19.83$ 22.96$ 26.08$ Implied Equity Value 484.62$ WACC 6.85% 11.96$ 14.95$ 17.95$ 20.94$ 23.94$ Diluted Share Count 27.0 7.85% 10.41$ 13.28$ 16.15$ 19.02$ 21.89$ Implied Share Price 17.95$ 8.85% 8.93$ 11.68$ 14.44$ 17.19$ 19.95$
Exit Multiple
Historical Broker Reports Projected
25Source: CapIQ, Wells Fargo, Jefferies
S&U / Capitalization Table
Assumptions:• Assumes transaction close
at end of year, but shows cash as of 9/30/2015
• EBITDA, CapEx and Interest numbers are projected for end of year
• L+450 and 9.500% interest rates shown for illustrative purposes
• Debt values do not include discounts on existing term loan or redemption premiums
Sources of Funds AmountSponsor Equity 516.8$ Tax Equity Partner - Term Loan B 1,050.0 Senior Secured Notes -
Total Sources of Debt 1,566.8
Uses of Funds AmountTransaction Value 1,489.6$ Fees 57.2 Cash Balance 20.0
Total Uses 1,566.8
($ in millions) Pro FormaPro Forma Capitalization Rate Maturity 12/31/2015 Adj 12/31/2015 % of TotalCash $17.0 $3.0 $20.0Revolving Credit Facility ($115) 2018 0.0 0.0Existing Term Loan L+750 2019 640.0 (640.0) --New Term Loan B L+450 2022 -- 1,050.0 1,050.0 67.0%Total Secured Debt 640.0 1,050.0Existing Senior Secured Notes 8.750% 2019 300.0 (300.0) --New Senior Secured Notes 9.500% 2022 -- 0.0 0.0 0.0%Total Debt $940.0 $1,050.0Market Value / Sponsor's Equity $494.4 22.3 $516.8 33.0%Total Capitalization $1,434.4 $1,566.8
Pro Forma Financials 12/ 31/ 2015 12/ 31/ 2015Adj . EBITDA $253.3 $253.3CapEx 113.4 113.4Interest Expense 78.0 56.8
Total Secured Debt / Adj . EBITDA 2.53x 4.14xTotal Debt / Adj . EBITDA 3.71x 4.14x
Adj . EBITDA / Interest Expense 3.25x 4.46x(Adj . EBITDA - CapEx) / Interest Expense 1.79x 2.46x
Assumes Transaction close 12/31/2015
26Source: CapIQ, Wells Fargo, Jefferies
Leveraged Buyout AssumptionsBuyout Assumptions Transaction Assumptions11/ 30 Close PriceCurrent Share Price 18.31 Minimum Cash Balance 20.0 Premium 20.0% Transaction Fees as % 2.0%
Buyout Share Price 21.97 FY 2015 EBITDA 253.3
Diluted Share Count 27.0 FY 2016 Pro forma Leverage 4.1xEquity Purchase 593.3 Term Loan B Leverage 4.1x
Secured Notes Leverage 0.0xExisting Debt 913.3 Entry Multiple 6.2xExisting Cash 17.0 Sponsor Equity Check as % 33.0%
Transaction Value 1,489.6 Tax Equity Check as % 0.0%
Debt Assumptions
Term Loan B Price L + 450bpsSenior Secured Notes Price Lower of L + 800 bps or 9.5%Term Loan B Amort. 2%Senior Secured Notes Amort. BulletRefinancing Fees 3%
27Source: CapIQ, Wells Fargo, Jefferies
Leveraged Buyout ModelSummary 2016E 2017E 2018E 2019E 2020E
EBITDA $245.4 $237.4 $229.7 $223.3 $217.9 Dep. & Amortization 214.1 205.7 199.1 193.5 188.8
Operating Income 31.3 31.6 30.6 29.8 29.1
Interest Expense 56.8 57.2 54.8 51.9 48.4 EBT (25.5) (25.6) (24.2) (22.1) (19.3)
TaxesTax Rate 0.0% 0.0% 0.0% 0.0% 0.0%
Earnings After-tax (25.5) (25.6) (24.2) (22.1) (19.3)
CapEx 110.0 102.9 99.5 96.7 94.4 Dep. & Amortization 214.1 205.7 199.1 193.5 188.8
Levered CF 78.6 77.3 75.4 74.6 75.1
Mandatory Amortization 21.0 19.4 17.9 16.4 14.9 CF Optional Debt Service 57.6 57.8 57.5 58.3 60.2
Excess CF - - - - -
Debt Schedule
Term Loan B 1,050.0 971.4 894.1 818.7 744.1 Senior Secured Notes - - - - -
Beginning Period Total 1,050.0 971.4 894.1 818.7 744.1
Term Loan B Amort. 21.0 19.4 17.9 16.4 14.9 Term Loan B Sweep 57.6 57.8 57.5 58.3 60.2
Total Paydown 78.6 77.3 75.4 74.6 75.1
Term Loan B 971.4 894.1 818.7 744.1 669.0 Senior Secured Notes - - - - -
Ending Period Total 971.4 894.1 818.7 744.1 669.0
2016E 2017E 2018E 2019E 2020ECash Balance
Beginning Cash Balance 20.0 20.0 20.0 20.0 20.0 Change in Cash - - - - -
Ending Cash Balance 20.0 20.0 20.0 20.0 20.0
Interest Expense
Term Loan B 5.6% 6.1% 6.4% 6.6% 6.8%Senior Secured Notes 9.5% 9.5% 9.5% 9.5% 9.5%
Term Loan 56.8 57.2 54.8 51.9 48.4 Senior Secured Notes - - - - -
Leverage Multiples
Bank Debt / EBITDA 4.1x 3.9x 3.7x 3.5x 3.2xUnsecured / EBITDA 0.0x 0.0x 0.0x 0.0x 0.0x
Total Debt / EBITDA 4.1x 3.9x 3.7x 3.5x 3.2x
Net Debt / EBITDA 4.0x 3.8x 3.6x 3.4x 3.2x
EBITDA Interest Coverage 4.3x 4.1x 4.2x 4.3x 4.5x
(EBITDA - CapEx) / Interest 2.4x 2.4x 2.4x 2.4x 2.6x
Sweep Metrics
Cumulative Secured Paydown 7.5% 14.8% 22.0% 29.1% 36.3%Total Debt Paydown 7.5% 14.8% 22.0% 29.1% 36.3%
28Source: CapIQ, Wells Fargo, Jefferies
Leveraged Buyout Exit
Cash on Cash Sensitivity
IRR Sensitivity Premium Paid 15.0% 17.5% 20.0% 22.5% 25.0%
5.2x (0.3%) (0.8%) (1.3%) (1.8%) (2.2%)5.7x 3.8% 3.3% 2.8% 2.3% 1.8%6.2x 7.4% 6.8% 6.3% 5.8% 5.3%6.7x 10.5% 10.0% 9.4% 8.9% 8.4%7.2x 13.3% 12.8% 12.2% 11.7% 11.2%
Premium Paid 15.0% 17.5% 20.0% 22.5% 25.0%
5.2x 0.98x 0.96x 0.94x 0.91x 0.89x5.7x 1.21x 1.18x 1.15x 1.12x 1.09x6.2x 1.43x 1.39x 1.36x 1.33x 1.30x6.7x 1.65x 1.61x 1.57x 1.53x 1.50x7.2x 1.87x 1.82x 1.78x 1.74x 1.70x
Exit
Multi
ple
Exit
Multi
ple
Sponsor Returns
Year 1/ 1/ 2016 12/ 31/ 2016 12/ 31/ 2017 12/ 31/ 2018 12/ 31/ 2019 12/ 31/ 2020EV Multiple Upon Exit 6.2x
Enterprise Value 1,350.9 Debt 669.0 Cash 20.0 Equity Value (516.8) 701.9
Returns IRR 6.31%Cash Multiple MOIC 1.36x
29
Considerations / Business Risks
Loss of Access Lines
Region Specific
Risks
Higher Interest Rates
Regulatory Related
• 2013: 4.8% and 2014: 6.8% of access lines were lost
• Losses were due to competition from cable companies that provided bundled offerings and wireless carriers
• Expected to continue to lose access lines
• Service territory spans 17 states, 85% of the 1.1 million access lines are in ME, NH, and VT, which experienced a 7.2% decline in total access line service, compared to 4.6% decline for the remainder of the operations in 2014
• Demand is seasonal for certain areas
• Expecting an increase in interest rates over long-term
• Risk that bonds are not able to be sold into market based on investor appetite
• May require issuing bonds at a discount or that debt may be unsold to market/buy-side
• Focus on Data and Internet services• Built and launched high capacity Ethernet
services• Converting services from Asynchronous Transfer
Mode (ATM) and Frame Relay to Ethernet based products
• Provide attractive pricing features and appealing bundle offers
• Install forestall seasonal disconnects or seasonal suspends
• Add advanced products services that meet customer needs for each specific region
• Provide flexible voice services for regional business customers
• Refinancing risks due to increased interest rates, mitigate through puts/calls or swaps
• Mitigate risk of unsold bonds by securing committed financing from banks• Higher fees expected if committed
financing is necessary
• FairPoint must abide by FCC regulations
• Regulations and technology change rapidly• More regulation in internet and wireless
sectors• Compliance and administrative costs
to comply
Risks Mitigations
• Minimize interstate communications tariffs• Remaining current on legal changes• Complying with regulation along with competitors
30Source: CapIQ, Wells Fargo, Jefferies
Final Recommendation
Financial Analysis
Credit Worthiness
• Character:• Weak revenues and historical performance, coupled with previous bankruptcy in
2011 raises serious considerations• Capacity:
• A heavily levered company with historical credit difficulties and poor cash flow generation
• Not capable of hosting large amounts of debt; can only hold 4.1x of debt in Term Loan B given 30% equity check necessary
• Conditions of industry:• Declining industry, not many growth opportunities, steadily dropping
revenues/customers• Collateral:
• Large amounts of collateral could partially offset another potential bankruptcy, but credit risks as well as declining revenue, EBITDA and levered FCF are serious investment negatives• Discounted Cash Flow Analysis:
• Projecting $17.95 implied share price, below the current $18.31 share price• Leveraged Buyout Analysis:
• Shows firm is only capable of 4.1x leverage and has difficulty with more expensive debt
• Tax benefit implications present challenge for evaluating true free cash flow• Opportunities to expand or improve business are difficult, given heavy cuts to capital
expenditures and headcount, indicating downsizing of the firm
Final Recommendati
on
• Our final recommendation would be to not proceed with the LBO transaction at the proposed share price of $21.97 (representing a 20% premium over current price)• Rapidly rising share price due to first positive quarter would also imply a more
expensive buyout price, assuming a 20-30% premium• Future projections show decline in core parts of business, with heavy divestures and layoffs• Equity check of roughly 30% only permits 4.1x leverage• IRR of 6.31% also indicates unprofitability of buyout• LBO is not recommended due to other company and industry risks, including
overall decline and downsizing making the business unattractive
31
APPENDIX
32Source: CapIQ, Wells Fargo, Jefferies
Summary of Indicative Terms
For Illustrative Purposes
Borrower: FairPoint Communications
Facility: $1,050 million Term Loan B
Maturity: 7 years
Expected Corporate Ratings: B3 / B-
Expected Facility Ratings: B3 / B-
Indicative Pricing: L + 450
LIBOR Floor: 1.000%
Amortization: 1% per annum
Optional Redemption: 101% soft call protection for the first 6 months
Negative Covenants: Usual and customary
Underwriting Fee: 2.00%
Secured Debt
33
115
Source: FairPoint 10k
Debt Maturity Schedule
2016 2017 2018 2019Thereafter$0
$200
$400
$600
$800
$1,000
605
300
Revolving Credit Facility, 2018Term Loan, due 2019 (7.50% Weighted Average)Senior Secured Notes, due 2019 (8.75% Fixed)
6.4 6.4
6.4
2016 2017 2018 2019Thereafter$0
$200
$400
$600
$800
$1,000
1050
Revolving Credit Facility, 2018Term Loan B (L+450)Senior Secured Notes (9.5% Fixed)
($mm) ($mm)Existing Debt Maturity Proforma LBO Debt Maturity
115
34Source: FairPoint 10k
Historical Financials(in thousands) 2010A 2011A 2012A 2013A 2014A 2015ARevenue $1,070,986 $1,029,490 $973,694 $939,354 $901,396 $855,783
% growth -4% -5% -4% -4% -5%Adj . EBITDA 277,941 265,030 290,574 253,344
% growth 5% -9% 15%% margin 29% 28% 32% 30%
CapEx 197,800 176,100 145,066 128,298 119,489 113,408% of revenue 17% 15% 14% 13% 13%
Cash Flow SummaryAdj . EBITDA 277,941 265,030 290,574 253,344Pension contributions (17,850) (19,971) (28,266) (28,000)Post-retirement healthcare payments (3,183) (3,470) (5,808) (6,000)Less: CapEx (145,066) (128,298) (119,489) 113,408Unlevered Free Cash Flow $211,002 ($141,300) $111,842 $113,291 $137,011 $105,936Cumulative Free Cash Flow for Debt Repayment $211,002 $69,702 $181,544 $294,835 $431,846 $537,782
2010A 2011A 2012A 2013A 2014A 2015A
($150,000)($100,000)
($50,000)$0
$50,000 $100,000 $150,000 $200,000 $250,000
Free Cash Flow (thousands)
2012A 2013A 2014A 2015A$0
$250,000
$500,000
$750,000
$1,000,000
RevenueEBITDA
EBITDA/Revenue (thousands)