Verizon's NE fixed line biz to merge with FairPoint

NEW YORK (Reuters) - Verizon Communications Inc. <VZ.N> said on Tuesday it will spin off its fixed-line business in the northeast United States and merge it with rural telecommunications provider FairPoint Communications Inc. <FRP.N> in a deal worth $2.7 billion.

Verizon will spin off its Maine, New Hampshire and Vermont local exchange businesses as a separate entity, which will be merged with FairPoint, a move that analysts said would help it focus on expanding high-speed Internet and video services.

Growth in traditional telephone services is slowing as consumers shift to wireless and Internet-based services, prompting consolidation among local carriers.

"From an operational standpoint, the company is ridding itself of a nonstrategic asset that Verizon almost certainly viewed as a declining annuity, while delevering its balance sheet without any tax leakage," said Christopher King, an analyst at Stifel Nicolaus.

Verizon will receive $1.7 billion in a combination of cash and issuance of debt securities in the transaction. Its shareholders will receive about $1 billion in stock, or one share of FairPoint stock for around every 55 Verizon shares held as of the record date.

The two companies said they expect the deal to be completed within the next 12 months. Verizon's stockholders will own about 60 percent of the merged company and FairPoint stockholders the remainder.

Both the spin-off and merger are expected to be tax-free transactions, except for cash paid in lieu of fractional shares.

"Verizon received a fair value for these properties and can now sharpen its focus on our other operations," Verizon Telecom President Virginia Ruesterholz said on a conference call with reporters.

The No. 2 U.S. telecoms operator has been investing heavily in building a fiber-optic network that can carry advanced, high-speed Internet and video services.

The FairPoint deal does not include Verizon Wireless, Verizon's venture with Vodafone Group Plc. <VOD.L>, or Verizon Business, the former MCI, the companies said.

The move will create the eighth-largest U.S. telephone company, with 1.6 million access lines, 234,000 high-speed data subscribers and 600,000 long-distance customers, FairPoint said.

FairPoint shares surged $2.95, or 15.9 percent, to $21.49 in afternoon trading. Verizon shares eased 16 cents, or 0.4 percent, to $37.17 on the New York Stock Exchange.

FairPoint expects $60 million to $75 million in annual cost savings for the combined operations after the businesses are fully integrated, which will take about a year.

It also said the deal will add to free cash flow upon completion and that its annual dividend of $1.59 per share will continue unchanged.

Rural phone companies have come under particularly strong pressure to consolidate as cable television companies launch all-in-one services of video, phone and Internet services.

"Effectively we've provided a foundation for growth that really would've taken us years to build through the acquisition and integration of much smaller companies," Gene Johnson, chairman and CEO of FairPoint, said on the conference call.

FairPoint said it plans to significantly boost availability of high-speed Internet services in the region within the first 12 months after the merger is completed.

Merrill Lynch advised Verizon on the deal. Lehman Brothers acted as FairPoint's lead financial adviser, while Deutsche Bank Securities and Morgan Stanley acted as advisers.

Verizon's operations in those states cover about 1.5 million phone access lines, 180,000 high-speed Internet subscribers and 600,000 long distance customers.