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June 2005
Dialing for Dollars
By Ellison Clary

      Constant change has marked the evolution of this Charlotte-based telephone company now big enough to make the country’s Top 20. Gene Johnson, chairman and chief executive officer of FairPoint Communications, Inc., promises more change ahead, and in additional ways.

The company that went public in February of this year is adding to its acquisition strategy a concentration on internal growth to produce profitability, according to Johnson, and to pay healthy, dependable dividends. Indeed, for the quarter ended March 31, 2005, FairPoint reported net income of $11 million, compared to a loss of $4.6 million for the similar period of 2004. Cash available for dividends was approximately $12.8 million for the 2005 quarter, compared to a negative $3.1 million for the first quarter 2004.

Cash available for dividends is now the primary objective for the company that lost $23.7 million for fiscal year 2004. The loss wasn’t unusual, Johnson says, because FairPoint didn’t concentrate on net income while it was private and putting together what has become a string of 27 small telephone companies in 17 states.

Now trading on the New York Stock Exchange, FairPoint is in a different world. “We’re focused on growing the company internally and through acquisitions,” Johnson says. “We intend to use a substantial portion of our excess cash to pay dividends.”

Johnson is depending on Valeri Marks, president, and Peter Nixon, chief operating officer, to build profitability on a base of exemplary customer service and innovative services.

Nixon joined FairPoint when it acquired Chautauqua and Erie Telephone Corporation in New York in 1997. With 27 years in telecom, Nixon emphasizes FairPoint’s ability to benefit from the size, scale and scope of the network it has fashioned, and its attention to community development.

“In this information age economy, we are the providers of the supporting networks in rural America,” Nixon says. “It’s incumbent on us to ensure that the residents and businesses in our footprint have affordable access to the same service as their urban counterparts.”

Marks, a 23-year telecommunications veteran, who joined FairPoint in October 2004, came from Sockeye Networks in Massachusetts where she was chairman and chief executive officer. She has been an executive with industry icons such as Southwestern Bell Communications and Ameritech.

As president of FairPoint, Marks oversees sales, marketing and customer service. She spends a majority of her working hours on the road, visiting with the 850 FairPoint employees in its individual companies from Virginia to Washington state. A typical market visit lasts two or three days.

“I talk to the front sales people, go on sales calls and on customer service calls,” she says, describing her routine. “I talk with the techs about what they’re seeing and how we’re delivering.”

Her goal, she and Johnson agree, is to fashion a new FairPoint with standard operating procedures to enhance customer service. Emphasis will be on combining best practices from each of those 27 companies. But that means more change, she says.

“You make people comfortable with change through consistent messaging about opportunities ahead,” she continues with a smile. “Gene does Web casts and newsletters, and he’s open to questions when he’s visiting in person.”

Johnson does this, he says, “Because you as an employee want to really trust the guy who’s running the company. You want to know he has a good solid vision.”

The vision that Johnson, Nixon and Marks share includes making each FairPoint company a one-stop-shop for telecommunications needs. The customers who use more than 276,000 access line equivalents want their company to deliver everything from basics such as long distance calling to faster Internet service and video over broadband.

“Although we’re in rural markets,” Nixon says, “it’s real exciting the way our customers embrace technology and innovation.”

More innovation is just ahead, he vows, with FairPoint working on ways to offer more efficient integration between voice data and video and faster Internet Protocol.


Connected to Charlotte

But how did this patchwork quilt of telephone companies come to be, and to be based in Charlotte? That’s a story of pure entrepreneurship, says Johnson, who was essential in building it.

The story begins long before there was an entity called FairPoint Communications. Johnson was running a boutique investment banking firm, Johnson Crowley & Associates, when he was approached by a lawyer and a corporate recruiter, both based in New York City.

Dan Bergstein, now a partner in Paul, Hastings, Janofsky & Walker on Manhattan’s Park Avenue, and Meyer Haberman, a headhunter for top executives, wanted to fashion a string of independent telephone companies. They approached Johnson for help because of his solid record as an investment banker for cable television and radio companies.

“They wanted me because I knew how to make deals,” says Johnson, a Norfolk, Va., native who arrived in Charlotte in 1969 as a U.S. Army captain assigned to the Queen City’s induction station. He finished his tour and stayed in Charlotte to earn a business degree in accounting at the University of North Carolina at Charlotte.

Johnson and wife Vickie, also from Norfolk, fell in love with Charlotte. By the time FairPoint was an entity that needed a headquarters, Johnson says there was no doubt where that would be.

“Charlotte is a great place,” he says. “I’m active in the life of UNC Charlotte and I’m going on its board of trustees in July. We’ve been here a long time and know a lot of people.”

Back in 1988, when Johnson, Bergstein and Haberman started looking for acquisition prospects, there were about 1,200 small, mostly rural, telephone companies throughout the United States. These were cooperatives or mom-and-pop operations that had grown up in places where settlements were so sparse the Bell companies and AT&T had no interest in them.

Early on, they realized they needed a partner who understood the business, so they brought in Jack Thomas, a veteran of Sprint United who was helping to build a rural telephone company near Wilkes Barre, Pa. He has since left the company.

Owners of small telephone companies were selling because they didn’t have a family member interested in the business or they lacked a competent younger generation of executive talent. But they also were chummy, Johnson learned, and they didn’t take kindly to buyers from outside the industry.

Johnson and his partners spent four years bidding unsuccessfully on telephone companies. “We chased deals, we chased deals and we chased deals,” Johnson grins grimly. “I’d be the highest bidder on a deal and I’d lose.”


Connecting Up in Kansas

Finally, in the summer of 1992, a telephone firm in western Kansas and eastern Colorado came up for sale. Sunflower Telephone Company was owned by an Employee Stock Ownership Plan and lawyers for the ESOP trustees told them they had to sell to the highest bidder.

“We were exactly five percent higher than the next highest bidder,” Johnson recalls. “I got a call from the president of the company. He said, ‘Congratulations. You’ve come from being a bridesmaid to a bride.’”

Johnson and his partners signed a contract on Monday after Labor Day and, after negotiating through government approvals and raising the $25 million purchase price, they became the proud owners of Sunflower in May 1993.

The partners started working on more deals, and their success was much more rapid. Along the way, Johnson disbanded his investment banking firm and the four entrepreneurs operated under various names.

In 1991, they founded MJD Communications, now FairPoint Communications. From FairPoint’s headquarters on Charlotte’s East Morehead Street, they strung together a chain of telephone companies that reached 30 before they sold four.

To the customers of these companies from Florida to Vermont, FairPoint brings more professional management, more scale and more scope, Johnson says.

“The customer doesn’t see any change in service quality, that’s still very high,” Johnson says. “What you see is a broader range of products and services we sell the customer. But we’re still a local company and that’s a huge advantage. If our customer sees a telephone truck, he can flag it down and get service.”

Being a strong local player in each of its communities has always been a vital part of FairPoint’s mission.

“As our communities go, so go we,” Nixon says. “It’s important for us to work hard in each rural market to make our communities strong. We are a major presence in most of them.”


CLECs Don’t Click

FairPoint was performing well enough in the late 1990s that Johnson and his partners decided to branch out. They created a Competitive Local Exchange Carrier to operate on the edges of their local telephone companies service areas and compete with industry behemoths such as Verizon and BellSouth.

“The goal was to really grow the company rapidly through the CLEC,” Johnson explains. “We did a recapitalization and brought in some investors. One of them was Carousel Capital in Charlotte. It was a successful investment for them.”

Nelson Schwab, co-founder and managing partner of Carousel Capital, praises Johnson and his partners. “We have a high impression of Gene and the whole team there,” Schwab says. “They know the business. They run a very professional operation.”

Carousel Capital sold its investment in the company in 2000 and FairPoint found other financing.

Shortly after, the business plan that had become a telecommunications fad proved difficult to work. “Billions of dollars were lost building CLECs nationwide,” Johnson says. “The board gave me the job of extricating ourselves from that business. We took a $300 million write-off in 2001 and 2002. We did an amazing job of getting out of the CLEC business.

“Three years later, we took the company public, which is really amazing,” Johnson adds.

FairPoint intends to pay shareholder dividends that are 70 to 80 percent of its free cash flow, Johnson says, adding, “The kind of returns we are talking about make a pretty interesting stock for a portfolio.”

FairPoint went public for several reasons, he says. The company’s debt was far too high and the partners yearned for a stronger balance sheet to reduce fixed costs of interest payments. Being public also provides greater acquisition flexibility because FairPoint can offer stock-based transactions.

“From the standpoint of making acquisitions, assimilating them and operating the business, we do that as well as anybody in the industry,” Johnson says assuredly. “With our CLEC, we got away from our core business and it got us in trouble.”

Johnson, 57, likes what he and his partners have built. “We started with a little over $1million,” he says. “Now we have a public company worth over $1 billion.”

FairPoint plans to continue acquiring firms and, in fact, announced in its first quarter financial results that it acquired Berkshire Telephone Corporation in Eastern New York State on May 2. It also said it has a signed agreement to acquire Bentleyville Communications in Pennsylvania.

Johnson expects FairPoint to grow dramatically. It will continue to concentrate on rural areas, but will make its member companies much more sales and marketing oriented.

“We are all aligned very well, the employees to the shareholders,” Johnson says proudly. “In five years, we’ll be even more focused on the customer than we are today.”



Ellison Clary is a Charlotte-based freelance writer.
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