FairPoint Communications Inc (FRP): Here’s How One Investment Fund’s Demands Could Drastically Boost This Stock

According to its bio, Maglan Capital is a debt-focused investment fund involved in “all parts of the distressed cycle.” Maglan’s distressed master fund made over 40% in 2012, and its primary investment goal is “to create value for investors by achieving superior, risk-adjusted returns through all market cycles, with a vigilant concentration on capital preservation.”

FairPoint Communications Inc (NASDAQ:FRP)

Earlier today, Insider Monkey received an e-mail from Maglan, mentioning that it has demanded the following conditions from FairPoint Communications Inc (NASDAQ:FRP) in a schedule 13D:

1.       The immediate commencement of a $1.50 annual dividend to shareholders, to establish a dividend program in-line with other industry participants and establish stability for the Company’s share price at a price above $15;

2.       A review of the Company’s sale process for the assets that comprise the “Telecom Group”- FairPoint’s non-core, legacy business which “generates really solid cash flow” and a piece of which was sold for more than 6x trailing EBITDA earlier this year; and

3.       A review of the Company’s growth capital expenditure budget and expense cutting strategy, to ensure that stockholder capital is being directed to those areas that offer the highest possible long-term return.

In a separate letter sent to FairPoint dated April 11th, 2013,
Maglan conveyed the nature of their schedule 13D, mentioning, “FairPoint’s stock trades at a significant discount to its peers- approximately at a 2x EV/EBITDA discount.”

The letter also mentioned the following:

Its share price is currently at approximately $7, in contrast to the $24 share price when it emerged from Chapter 11 in 2011. Moreover, according to the most recently reported short-interest data (for March 28, 2013), FairPoint has the nefarious distinction of having the highest short-interest ratio on NASDAQ (for any company with reasonable trading volume) with over 4.532 million shares short (26.1 million total float; by Maglan’s estimates, there is a lot less outstanding for borrow than the total float) and 80 days to cover. Shareholders have been patient with the company’s operational turnaround and have suffered because the Board has not been vigilant in protecting shareholder value.

In the letter, Maglan Capital explained, “Operationally, FairPoint Communications Inc (NASDAQ:FRP) has made enormous strides. The Company’s revenue is stabilizing and management expects it to begin to grow later this year.” Furthermore, the fund said “We note that, other than through Angelo Gordon & Co., the Board has de minimis ownership of the Company’s shares.”

The pièce de résistance (emphasis added):

All of this gives us serious concerns about the current Board’s sense of urgency and alignment of interests with the Company’s owners. We suspect that our concerns are shared by a number of other large stockholders, and are of the impression that there has been little action taken, despite these concerns having been voiced directly to members of the Board in the past. Accordingly, we believe that it is important that the Board bring focus and urgency to the implementation of potential value-creating initiatives.

“With revenue expected to grow this year and CapEx coming down, a dividend of $1.50 per annum will cost the company approximately $40 million- well within the range of comfort,” the letter added, also mentioning that a dividend would likely “substantially increase the cost to short the stock.”

This is an important point to make, and the rest of the details can be seen below:


Letter to FairPoint

Disclosure: none