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


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


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


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%


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%


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


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


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


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)

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