Maglan Capital Sends Letter to Fairpoint Management, Calls for Sale

Jun 6 2016 | 10:38pm ET

Distressed investment specialist Maglan Capital has sent a letter to the CEO and board of directors of longstanding portfolio company Fairpoint Communications in which it urged the company’s management to bring “focus and urgency to the implementation of potential value-creating initiatives, including a sale.” 

Although not known as an activist manager, Maglan often takes activist positions. In addition to a possible sale, Maglan suggested the Fairpoint board also consider the implementation of a recurring dividend, a share repurchase program, debt retirement and refinancing, in an effort to increase returns. 

Unlike many similar activist letters, Maglan readily cedes the operational strides made by Fairpoint. “The company’s revenue is stabilizing and growth is coming,” the letter states. “The company…is well positioned to generate consistent cash-flow going forward.” Some $700 million in debt has been removed from the company’s balance sheet, the financial footing is sound and results are improving, notes Maglan. 

However, the investment manager sees a disconnect between the improved performance and its valuation, and lays the blame at management’s feet. “We believe there is a serious discrepancy between FairPoint’s improved balance-sheet, operating performance and prospects, on the one hand, and its current market valuation, on the other,” Maglan writes. “It is our view that this discount is directly linked to the Board’s failure to act in ways that protect and enhance shareholder value and reward shareholders for the Company’s successes.”

Maglan’s letter goes on to point out that FairPoint’s stock trades at a significant discount to its peers and significantly below the $20+ share price it achieved in early 2015 after successfully dodging labor issues. “Shareholders have been extremely patient with the company’s operational turnaround and have suffered, we believe, because the Board has not been vigilant in protecting shareholder value,” Maglan states.

“FairPoint’s current enterprise-value is 5x projected 2016 EBITDA, among the lowest in its peer group, while comparable companies are valued in a range of 6x to 9x+ EBITDA," the letter continues. "At a 6x valuation, FairPoint’s share-price would be $23, or more than 75% above the current price.”

Fairpoint closed Monday up 2.8% at $13.59. Maglan has been an investor in the regional telecom company since its Chapter 11 bankruptcy case almost six years ago, making it among the company’s oldest shareholders. It owns approximately 7.5% of the firm.

Founded in 2011 by former Credit Suisse executives David Tawil and Steven Azarbad, Maglan's existing event-driven fund focuses on the liquid instruments of companies approaching, in, or exiting bankruptcy. Subject of an in-depth Q&A on FINalternatives a year ago, it carries a concentrated portfolio of 12-15 high-conviction investments in single-name, largely unlevered core long positions.

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