Fourth bidder for Burlington Telecom might return

by Timothy McQuiston Vermont Business Magazine A fourth bidder for Burlington Telecom may yet emerge. Mayor Miro Weinberger revealed September 20 the Letters of Intent and details regarding the Burlington Telecom bid finalists. But much of the City Council reaction was to a fourth, local bidder who dropped out right before the final list was presented. At least two councilors are holding out hope that fourth bidder will jump back in. Today, the mayor and Council President Jane Knodell announced that they would attempt to find a way around a problem with that fourth bid, so it could also be considered by the Council. The Council, in any case, is expected to pare the bidders down to just two on October 2.

One councilor called the withdrawal of the fourth bidder a "breach of trust" with the mayor. Also, the one remaining local bidder KBTL (Keep Burlington Telecom Local) was the lowest bidder and came with strings attached that the head of the advisory board believes are not viable going forward.

The bid from the Canadian company Ting was $27.5 million; Schurz from Indiana was $30.8 million; and KBTL was $12 million, with $10.5 million in cash, including $10 million financed at 14 percent interest. All the bidders offered a way for the city to retain a minority stake in the "new" BT. KBTL would run the fiber-based telecom as a for-profit co-op, which would include current subscribers. BT provides Internet, phone and television service.

The Council will vote to narrow the search down to two finalists on October 2, with a final vote on October 16. The mayor could veto the Council's decision, but would have no authority in the decision other than that.

Because of non-disclosure agreements, city councilors knew who the fourth bidder was and were able to review its proposal, but neither they nor the mayor could disclose who it was or what terms they were going to propose. Weinberger said in announcing the three bids that he had presented his concerns to the bidder and to the Council and that the bidder independently decided to withdraw. Weinberger said he could not disclose what his concerns were.

However, after the mayor revealed the bids, Council President Jane Knodell and Councilor Kurt Wright said on local access television ( that the fourth bidder could possibly be persuaded to rejoin the process.

A few days later, on September 26, Weinberger and Knodell released a statement which hoped for that exact result.

“After extended consultation with the City’s attorneys and Council discussion, there was a strong Council consensus that the City should explore whether the possible conflict of interest with the fourth bid could be resolved. If so, the fourth bidder will be encouraged to promptly submit a final LOI. Together we will be pursuing this outcome immediately.”

The “conflict of interest” language hints at the mayor’s initial concern with the fourth bidder’s proposal.

"Many city councilors were concerned about how this company disappeared from the mix," Wright said. He and Knodell both felt the mayor had a hand in its withdrawal. "There was great, significant support for this company."

"In my evaluation, they were the strongest from the point of view of business formation, business services, creating good jobs, building the tech economy," Knodell said. The company had been described as a local, "private equity" firm. However, neither Wright nor Knodell described it as such or in any other way provided who was behind it or what its bid might have looked like.

"It's difficult going forward with a total breach of trust," Wright said.

Both he and Knodell clearly blamed Weinberger for undermining the process that led to the fourth bidder dropping out the day the council was to have received the final bids.

"I think it can be safely said that they just didn’t withdraw of their own volition," Wright said.

"Unfortunately," Knodell said, "That fourth option was taken away from the Council before we had an opportunity to hear, as a group, from the mayor about his concerns."

"We don't know how it all would have played out, but the disappointing part is that we never had the opportunity to have all that played out," Wright said.

"We need respect for the City Council," Knodell said. She said that one branch of government should not make decisions for all branches of government.

Wright said: "We certainly wouldn't want that happening in Washington. We wouldn't want that happening in Vermont, with the governor and Legislature, and we wouldn't want that happening in Burlington."

The long-serving councilors were respectful and conciliatory toward the mayor, despite their strong objection to his perceived role in the fourth bidder dropping out.

"Mayor Weinberger is extremely hard working. He's accomplished a lot and he hopes a lot for the city," Knodell said. "We just have a different opinion on what the process should have been here."

"I'm completely confident that everyone's heart is in the right place in wanting the best result," Wright said.

Wright, a Republican, ran for mayor against Weinberger, but lost by a comfortable margin (58 percent-37 percent in March 2012). Knodell is a Progressive. The mayor's office has been dominated by Progressives or Progressive leaning Independents for more than three decades (Bernie Sanders, Peter Clavelle, Bob Kiss) with a short interlude for one Republican Mayor (Peter Brownell, 1993-1995). Weinberger is the first Democrat since 1981. Wright is currently the only GOP member on the Council.

Somewhat lost in all the consternation was the information on the remaining three bidders.

Even in the discussion between Knodell and Wright, the two outside bidders, who were also the highest bidders, received minimal attention, perhaps because they are similar and straightforward.

"The advantage by going with Schurz or Ting," Knodell said, "is they're well capitalized. They have resources."

They are cash bids, Knodell said, "That's pretty attractive, in many ways," but BT would no longer be Burlington-based and their ultimate interests are related to their shareholders.

Knodell took more time to discuss the one remaining local bid from KBTL.

"I think the really strong selling point for Keep BT Local is that it does remain local, not municipally owned, so, there is a difference," she said, which is how BT started out.

"If the company is successful, the benefits will accrue to the member owners, will accrue locally and will not accrue to shareholders in Ting, or the family that owns Schurz," she said.

Knodell said, "The relative weakness in their bid is, compared to Schurz and Ting, is that they are thinly capitalized."

As a startup, KBTL will have little equity, she said, and be reliant on debt.

Knodell hopes, as the original plan for BT hoped, that it would expand beyond Burlington, and especially to Winooski and South Burlington, where it has a smattering of subscribers now.

All the bidders pledged to both expand the service, honor net neutrality and sign an agreement (yet to be fully fleshed out) that would avoid selling in the future to a firm that would create a monopoly in Burlington. Affordability for customers was another key component of the bids.

The firms also pledged to hold Internet service rates at a similar level as they currently are, but that downloaded programming (streaming, etc) would have to be determined by fees charged by those providers.

They also pledged to build out the system to all but a handful of hard-to-reach Burlington addresses. The two larger bidders promised this would be done soon after the deal was consummated, but KBTL could only commit to the build out as revenues allowed.

While the highest winning bids are in the $30 million range, Mayor Weinberger explained that at closing the city would likely get in the range of $5 million net. So even under the best-case financial scenario, the city would have to eat the bulk of the original $16.9 million, which is essentially already consumed.

The reason for this is that about $6 million would pay off existing debt and half of the resulting money (assuming a $30 million winning bid) would go to Blue Water, a local firm headed by Trey Pecor.

Pecor is the president of ferry company Lake Champlain Transportation, which is owned, along with the Lake Monsters minor league baseball team, by his family.

Blue Water was formed to allow the city to make the deal that resolved CitiBank's $33 million suit against Burlington. Blue Water took the hard assets and the risk. The city and CitiBank would then split the other half. The city would pay another million toward legal and other costs, leaving it with that $5 million.

The deal ultimately would need approval of the Vermont Public Utilities Commission, but the sale, which must meet an end-of-year deadline to secure the attractive, 50-50 terms with Blue Water, must close by the first of the new year.

Weinberger, undeterred by the City Council blowback, was upbeat in announcing the bids.

"This is an exciting day for the city. A day that many did not think we would get to, back in the darker times of Burlington Telecom," Weinberger said.

Even more than the $16.9 million hole the city had dug itself into by 2010, for which taxpayers were on the hook, was the dire situation of the city's finances and bond rating.

"Because we have fixed BT, we have restored the city's financial credit rating. That is something that saves us million of dollars a year," he said.

Once on the verge of junk bond status, the credit rating has improved and Weinberger said the rating agencies have suggested that the city's rating could further be upgraded if all goes well. In fact, the city-run Burlington International Airport did slip into junk bond status (Moody's) for four years, from which it emerged in late 2014.

"So," he said, "the longer financial impact, than just the direct net proceeds from the sale, is another important consideration when judging the sale."

As for the fourth bidder, he said he had presented his concerns to the bidder and to the City Council and the bidder independently decided to withdraw.

Weinberger said in announcing the bids: “I appreciate the hard work that the three finalist bidders have put into the proposals the city has shared today, and thank them for their willingness to participate in this transparent, extended, and competitive process. While I will defer weighing in on the merits of the specific proposals until after the final City Council executive session next week (September 25), my review of the proposals leads me to conclude that we are on track to secure an outstanding resolution to the Burlington Telecom issues that have challenged the City for a decade. As long as the City gets the final steps of the process right, the days of Burlington residents and businesses being held back by a broadband monopoly are behind us for good, we will ensure excellent, affordable, high-speed internet service for Burlington residents and businesses, and we will close the book on the financial challenges that I promised to resolve as a candidate for office in 2012.”

Burlington Telecom Advisory Board (BTAB) Chair David Provost released the following statement:

“Years of hard work by community member volunteers on the BTAB, the Mayor and many on the City Council have put us in a place few thought we would ever reach when the magnitude of BT’s financial crisis became clear in 2009 – with an opportunity to recoup a substantial portion of the money taxpayers lost years ago, preserve for the long run the new BT’s ability to compete against Comcast or any other monopoly, finish the build out of our City so Burlington residents have an opportunity to enjoy the service it provides, and commit substantial new revenues to support the local tech economy, and to possibly retain a local voice through an equity stake in the ‘new’ BT.

“As we enter this final phase of the selection process of a buyer, I am excited for the community to meet the buyers and hear from them on their plans for BT and their commitment to this wonderful resource. I look forward to hearing from the community about the three finalists as we share the details of their proposals. As I have noted before, the BTAB has unanimously expressed serious concerns about the sustainability of KBTL’s financing plan and lack of operating experience and the reason for that concern is finally public today. In 2010, the Burlington Telecom Blue Ribbon committee – which I chaired – made it clear that BT could not succeed if it was overleveraged. A proposal that requires the assumption of $10 million of debt at 14 percent interest is not something I can recommend that the City Council advance.”

Bernie Sanders ally, Weinberger foe and longtime city employee Steve Goodkind had his own fourth option (or possibly fifth) for the City Council during its September 26 meeting, in which most citizen speakers wanted councilors to reject the out-of-state bidders. Setting the scene at City Hall, public speakers sit at a desk, with microphone, opposite the council who sit in a semi-circle with the mayor and legal counsel to the far left of the speaker.

Goodkind served the city for 32 years, most notably as public works director, which overlapped with Weinberger’s first term. Goodkind has been one of the leading advocates of the city’s Progressive politics. So, after retiring in 2013 he decided to run against his former boss in 2015.

Weinberger won easily (68.3 percent to 22.5 percent in a four-man race), but Goodkind then and now maintains that the city should shun all the bidders and retain BT as a city utility.

Following an awkward shot at Weinberger and a king-has-no-clothes-but-in-this-case-he-does analogy, Goodkind said the mayor’s “scheme” to sell off BT to Blue Water was “disastrous” and was now looking to fix the problem he created with “misinformation, political expediency and the blind faith of his supporters, who seem to support everything he says.”

After then likening the mayor (who looked on and took notes) to Republicans in Congress and the repeal of the Affordable Care Act, Goodkind made his point on the BT proposals.

“I think it’s apparent from the three proposals, that we’re really not getting what we want,” he said.

He said that all of the bids get something right, but the best and most obvious option would be “don’t sell it.”

“It’s doing well. It’s gonna do better,” Goodkind said. “All the things you want from it, we can have if you don’t sell it... There’s got to be a way to buy out the Blue Water deal. At that point we own it… Keep it local. Don’t sell it.”

The city wants to sell BT because of its financial burden. After BT’s near collapse, the city was not only sued by CitiBank, its bond rating was dragged down, which includes Burlington International Airport. BT finances stabilized with an agreement in March 2014 involving the Blue Water local investors and debt-holder CitiBank, but Mayor Miro Weinberger has pushed to rid the city of the obligation entirely.

Under his predecessor, Mayor Bob Kiss, the city made up the shortfall in BT's operating revenues (the $16.9 million), despite not being authorized to do so. Regulators put strict conditions on finances going forward.

Weinberger cautioned that even at the highest bid, the city would recoup only about $5 million, but emphasized that he felt that the city should not be in the telecom business.

Unlike the monopolies the city has with Burlington Electric Department and the airport, telecom is competitive and raucous, with large corporations like Comcast and other specialized fiber firms like FirstLight all fighting for the same customer.

The Kiss Administration had envisioned a public utility, similar to Burlington Electric or BTV or the roads, which would provide a public and commercial benefit to the city and its people.

Burlington Business Association Executive Director Kelly Devine said in a statement: “It’s important that the community understands the details of these options. The future of Burlington Telecom is important to our community and its businesses. High quality telecom service is a critical part of a vibrant downtown.”

The Vermont Public Service Board (now Public Utilities Commission or PUC) ruled in November 2010 that Burlington Telecom was in "wanton" violation of its Certificate of Public Good as related to its borrowing that $16.9 million from the city and failing to pay it back and for its failure to build out the network by 2008. BT began operating in 2003.

The Letters of Intent are now posted on the BT website, Members of the public can share their feedback for the Mayor and City Council to consider at [email protected]

This story is updated from one that ran on September 20, 2017.