FairPoint filing: Capgemini threatened to quit over cash


Fairpoint Communications chief consultant, Capgemini Inc. threatened to walk out in August, forcing the telecommunications company to capitulate and pay the Atlanta consultant 60 percent that the $50 million held back because of alleged poor service, according to a filing in a bankruptcy court in New York City on Monday.The deal was alluded to when Fairpoint first filed for Chapter 11 reorganization back on October 26. But in the Monday’s filing, Fairpoint --for the first time – asked the bankruptcy court to bless a special deal for the consultant, the only unsecured creditor thus far to secure a large percentage of what it is owed in cash. All the other unsecure creditors would only get paid in stock in the new company that emerges from Chapter 11 bankruptcy, though bondholders are working on a special deal of their own.In this deal, Fairpoint -- in a confidential deal to be reviewed by bankruptcy court in secret -- agreed to use Capgemini while it was in chapter 11, with their payment presumably guaranteed by court. Fairpoint had agreed to purchase Verizon’s landlines in northern New England back in 2007, and Capgemini was hired to make the transition to build the back office infrastructure necessary for that transition, called the “cutover.” But Capgemini, according to other filings to the Public Utilities Commission wanted to do more than a transition. It wanted to simplify Verizon’s complicated systems at the same time, something never attempted on such a large scale.This delayed the cutover until February, and caused all sorts of problems.“Following Cutover, FairPoint experienced increased processing time by customer service representatives for new orders, increased processing time for customer invoices, and an inability to execute automated collection treatment efforts,” Fairpoint’s filing said. “These issues negatively impacted customer satisfaction and resulted in large increases in customer call volumes into FairPoint’s customer-service centers. While many of these issues were anticipated, the magnitude of the difficulties experienced were beyond FairPoint’s expectations. Fairpoint withheld $50 million from Capgemini. In July, the consultant notified Fairpoint that it was in breach ofcontract, and therefore was entitled to “terminate its services” on August 3. “In the event that CapGemini terminated its services, FairPoint believed that it would incur considerable cost to replace Capgemini with an alternative service provider. Moreover, even if such an alternative could be found, it would take approximately six months to make the transition to a new service provider,” which would “likely result in a significant disruption to its business operations.”In an earlier motion, the bondholders said that Capgemini’s demand resulted in Fairpoint demanding an extra $25 million from them. Fairpoint said that the bondholders refusal to advance the money triggered the bankruptcy filing, leaving the bondholders with more than a half billion of unsecured credit. (The bondholder motion, which – among other things called for an investigation into the Capgemini deal – has been withdrawn as bondholders also try to work out a separate deal.)After several months of negotiation, the Capgemini and Fairpoint reached a deal on October 9. Fairpoint would pay Capgemini $30 million, $15 million up front and $15 million at the end of the year. That will still leave nearly $20 million of debt that Capgemini would try to collect in bankruptcy court like all the other unsecured creditors. Capgemini in turn vowed to support the overall deal, that would give 98 percent of new company to its secured creditors – the banks – while letting unsecured creditors scramble to get a portion of the remaining two percent.A hearing on the deal was proposed by Dec. 10. Other parties have until Dec. 3 to object. -- BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW
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