The complex arrangement Verizon and FairPoint Communications agreed upon in January — to spin off Verizon properties in Maine, New Hampshire and Vermont into a new entity and merge it with FairPoint — has met with stiff resistance from union leaders in New England who are trying to stop the sale.

Listening to both sides tell their stories, they don't seem that far apart. With two to three quarters to go before the deal is expected to close, there is a good chance they will work it out.

Union supporters have a Web site, www.stop-the-sale.org, but are doing more than posturing. Gathering 700 people for a weekend rally in the blustery northeast in February showed they mean business. However, the Communications Workers of America and the International Brotherhood of Electrical Workers say their aim is not necessarily to block Verizon from selling the assets but to stop it from selling them to FairPoint. “The whole campaign is based on blocking the sale for this particular buyer,” said Mike O'Day, district vice president for CWA Local 1500 and a full-time customer service rep for Verizon in Vermont. “We're very much opposed to a buyer coming in that will slash and burn.”

Walter Leach, FairPoint's executive vice president of corporate development, said the company has no plans to slash and burn and has committed to bringing jobs and more broadband to the area. Leach takes issue with the idea that the union is singling FairPoint out as an unworthy candidate.

“Their stop-the-sale Web site was put in place well in advance of FairPoint being identified as the bidder, so they went on record that they wanted to stop the sale — period,” Leach said.

How relevant that is to the ultimate negotiations remains to be seen. Leach said that once the rank-and-file employees hear how the transaction will work, there is no reason for them not to want it to happen.

O'Day was right when he said FairPoint is not a traditional telephone company and that CEO Gene Johnson had no background in telecom. “He's an investment banker,” O'Day said.

That he is. And as CEO since 2002, Johnson has carried on the investment strategy the company started in 1993 with its first acquisition of a small rural telco outside Dodge City, Kan. In 1994, the company made its first major acquisition by buying GTE properties in Maine and Vermont. It has since acquired 31 companies in 18 states.

At the end of Q3 2006, FairPoint had 308,858 access line equivalents, including voice and DSL subscribers. The majority of the companies it has acquired serve less than 2500 lines. After a merger with Verizon, it will have 1.6 million access lines, along with 234,000 high-speed data subscribers and 600,000 long-distance customers.

So acquisition is not just a strategy for FairPoint, it is the strategy. “We are a consolidator of rural ILECs,” Leach said. “We believe that, in the low-growth or no-growth industry that the wireline business is, scale and scope are important. We believe in getting larger.”

To make getting larger work financially, Leach admitted the company must typically create savings by consolidating some expense activity. However, he said they also typically kick up the marketing campaign, roll out a long-distance service and put a big push on broadband. Across its markets, FairPoint has an 88% addressable market for DSL and about a 24% take rate, according to Leach.

It is the consolidating of expenses that has the unions concerned. “Everyone is worried where the jobs will end up if FairPoint buys them. Their trend is to consolidate into megacenters,” O'Day said.

Although Verizon struck a deal with Vermont to keep a call center in-state, O'Day isn't confident his center will stay.

The unions have other concerns as well, including potential losses in their pensions, guaranteed economic development and FairPoint's perceived anti-union stance. “When we first started talking to them, they said they had nothing against unions and looked forward to working with us,” O'Day said. “Then Peter Nixon [FairPoint chief operating officer] said under no circumstances should unions have any participation in the public service board hearings. That's a 180-degree turn.”

O'Day said that ever since a shake-up in the local four years ago that brought a new philosophy to “work cooperatively with management if they worked cooperatively with the union,” the two parties have had a good working relationship. The relationship building has started between the union and FairPoint, but after a forum organized by U.S. Sen. Bernie Sanders (I-Vt.), which O'Day attended, he is getting mixed signals.

“Gene Johnson is one of the most likeable people I have ever met, but he's been telling everyone on a handshake that he will extend our contract,” O'Day said. “But that is not possible, and Nixon admitted they can't extend our contract. It has too much regional language in it.”

Beyond compensatory and job security worries, the union says its primary concern is the economic development that comes with continued investment in broadband — investment it doesn't think FairPoint is financially capable of continuing.

“For there to be good jobs, there has to be a sound economy, and that is going to be based on broadband access for all. Small communities in Vermont are not going to see economic development unless broadband is brought there,” O'Day said.

Leach believes FairPoint will not only be in the financial position to invest in these communities but has already committed to a faster timetable than Verizon. He said the company is very comfortable with the 37% equity/63% debt ratio of the merged company.

“It creates a strong balance sheet that allows us to meet all our obligations going forward,” Leach said. “Besides, at the end of the day, Verizon shareholders will own 60% of the surviving company, so the Verizon management team needs this to be a successful transaction.”

Although the unions may prefer the sale to be to a more traditional telephone company such as CenturyTel or Citizens, Leach said that is not workable for Verizon because it could not be conducted under the same tax-free structure as the FairPoint deal. A bigger company would have to own more than 50% of the surviving company and affect the tax-free status.

To the unions' concern of FairPoint being an investment company and not a telecom company, Leach said, “In fact, we are effectively bringing the old New England Telephone company back to these three states by bringing all the back-office infrastructure and the management decision process back to them.”

It is important to note, Leach said, that this was a negotiated sale in which FairPoint made certain commitment to its 3000 new employees, 2500 of whom are represented by a union. FairPoint committed to keeping the union employees in place and not reducing head count. It committed to not raising rates to consumers. It committed (as part of the regulatory approval process) to significantly expanding DSL addressability in the first 12 months following the merger.

Although FairPoint has not committed to bringing DSL addressability in all three states to its current 92% rate, it will improve significantly on Verizon's current 62%. And in Vermont, where the state has a commitment from Verizon to reach 80% by 2010, Leach said, “We will get to a higher number earlier than that to ensure customers in Vermont will be better off as a result of this transaction. We will beat Verizon's [current] target.”

That's not in writing yet, but Leach said it would likely be addressed in the regulatory approval process and ultimately be a condition somewhere.

FairPoint is currently comprised of approximately 12% union employees. The companies it acquires are generally family owned and not very unionized. “When we have acquired companies where a union was in place, they generally stayed in place. This deal was predicated on all union members staying with the company with the same compensation and benefits they have today,” Leach said.

One of O'Day's biggest concerns is that there will be no real corporate presence in the three states and that the call center in Vermont will get consolidated. Leach said that by bringing much, if not most, of the back-office infrastructure into these states, at least three new service centers will be put in place, and about 600 additional employees will be hired to support them. FairPoint said a billing center, a network operations center and an administrative center will be brought in.

As for O'Day's call center in Vermont, Leach said, “That's part of the 3000 employees we took with the transaction, and we would not eliminate any jobs at that call center.”

Leach said he believes once FairPoint gets a chance to tell its story to the union employees — that they realize there will be 600 new jobs, and that they will be working for an executive team very focused on northern New England — they ought to like it.

O'Day and company want more than a handshake.