How Michel Guite built, changed Vtel

Over the years, the Vermont Telephone Co., a privately owned telecommunications company that was acquired 21 years ago in a buyout led by former Wall Street executive Michel Guite, has proven itself willing to challenge government regulators and adept at negotiating rulings in its favor.
http://vtdigger.org/2015/08/04/part-2-how-michel-guite-built-changed-vtel/

PART 2: HOW MICHEL GUITE BUILT, CHANGED VTEL VALLEY NEWS AUG. 4 2015, 2:22 PM Editor’s note: This article is by John Lippman of the Valley News, in which it was first published Aug. 2, 2015. SPRINGFIELD — Over the years, the Vermont Telephone Co., a privately owned telecommunications company that was acquired 21 years ago in a buyout led by former Wall Street executive Michel Guite, has proven itself willing to challenge government regulators and adept at negotiating rulings in its favor. Although the Springfield-based company likes to emphasize its small-town Vermont roots and is “family owned,” Guite’s primary home and family are in Connecticut and VTel’s former major financial backer and chairman is a prominent member of a California billionaire family. Part 1: VTel’s $116 million promise. Guite made his name in the 1980s as a star telecommunications equipment industry analyst with Salomon Bros., the Wall Street investment bank that later was absorbed by Citigroup. In 1993, Guite teamed up with his former Stanford University dorm mate, Walter Hewlett, then a director of computer giant Hewlett-Packard and the eldest son of the company’s co-founder, to acquire the telephone system serving 14 southern Vermont communities, including Springfield, from GTE for $42.5 million. They renamed it Vermont Telephone Co., or VTel for short. Since then, VTel says it has invested more than $100 million of its own capital in system upgrades and technology improvements. It boasts of being the first telephone company in the state to introduce dial-up Internet service in the early 1990s and , later, higher-speed DSL over its copper telephone lines. VTel president Michel Guité addresses a roundtable of telecommunications executives and press assembled by Gov. Peter Shumlin in Montpelier Wednesday afternoon. Photo by Hilary Niles/VTDigger VTel president Michel Guité addresses a roundtable of telecommunications executives and media assembled by Gov. Peter Shumlin in Montpelier in Nov. 2013. File photo by Hilary Niles/VTDigger In the Springfield and southern Vermont area, the company has annually hosted free Thanksgiving Day dinners for seniors, supplied food banks, and says it has organized more than 2,000 “digital literacy” meetings with rural residents around the state to teach them how to use computers and navigate the Internet. VTel’s core business is its southern Vermont telephone system, which reported gross operating revenue of $19.3 million and a net loss of $359,000 in 2014, according to state regulatory filings, compared to gross operating revenue of $18.2 million and a profit of $1 million in 2013. The company swung to a loss last year principally as a result of $826,000 in “non-operating income expenses,” which VTel isn’t required to detail in the filing. In its 2010 application with the Rural Utilities Service for stimulus funding, VTel said its landline telephone system was losing customers at a rate of about 3.5 percent per year, which it attributed to people switching to mobile phones, a problem that is affecting all legacy carriers. To be sure, losing money on a landline phone business is not unusual as traditional carriers face fierce competition from mobile services and cable companies. The Department of Public Service’s 2014 Telecommunications Plan said landline phone carriers in Vermont cumulatively lost $39 million in 2011, according to one estimate. FairPoint, the state’s largest telephone operator, lost 33 percent of its lines between 2007 and 2011, according to the state plan. VTel said in its application for stimulus funding that it hoped introducing fiber-optic lines in southern Vermont would help to retain customers and “win them back.” VTel in recent years has managed to pay down its long-term debt from $27.3 million in 2006 to about $17 million in 2014, according to its application for stimulus funding and state regulatory filings, excluding the $35.2 million federal government loan that VTel received to help finance its statewide broadband project. VTel has $27 million remaining in principal on the federal loan, due in 2025, which has an average interest rate of between 2 percent to 3 percent and requires a principal payment of $192,000 per month, in addition to a current interest payment of about $56,000 per month, according to information provided by the U.S. Department of Agriculture, whose Rural Utilities Service awarded the loan. FCC PENALTY How Guite and Hewlett financed their acquisition is unclear, but in December 2002, parent company Vermont National Telephone Co. borrowed $33 million from the Rural Telephone Finance Cooperative and used $25 million of the amount to repurchase 5,000 shares, at $5,000 per share, of the 6,946 shares in the company owned by Hewlett, according to a copy of the loan agreement between VTel and the finance cooperative included in VTel’s application for stimulus funding. The headquarters of the Vermont Telephone Co., or VTel in Springfield on July 30, 2015. Photo by Sarah Priestap/Valley News The headquarters of the Vermont Telephone Co., or VTel in Springfield on July 30, 2015. Photo by Sarah Priestap/Valley News By 2008, VTel had repurchased a total of 6,000 shares from Hewlett — the most recent 400 shares at a sharply reduced price of $1,274 per share with the remaining 946 shares subject to a “put/call” arrangement whereby either can require the other to buy or sell his shares. Hewlett’s “ownership represents less than 10 percent of VTel’s value and he is committed to remain a stockholder and advisor through 2014,” VTel said in its application for stimulus funding, explaining that as vice chairman, Hewlett “advises VTel on broadband technology deployment, wireless and optical fiber technologies, employee benefits, software, and customer service.” Hewlett’s minority ownership stake nonetheless presented problems for VTel last year when the Federal Communications Commission levied a $25,000 penalty against the company for “willfully and repeatedly” failing to report accurate financial information for principals associated with its application in order to receive a “bidding credit” as a small rural telephone operator in the auction purchase of spectrum licenses. During an FCC auction of spectrum licenses in 2009, VTel sought a 15 percent bidding credit on any licenses it was awarded. The application required VTel to disclose “gross revenues” of material principals and affiliates associated with the bid, which included Hewlett, who at the time was both a shareholder in the parent company and trustee of the Guite Family Trust, which was also a shareholder in VTel. In its application, VTel reported that Hewlett, a former board member of Hewlett-Packard Corp. and former chairman of onetime major HP stockholder The William and Flora Hewlett Foundation, had “no gross revenues.” When FCC staff inquired further about VTel’s ownership structure, the company responded by twice amending the information in its application, but both times affirmed Hewlett’s “gross revenues as zero,” according to the FCC. But an alert FCC staff member “asked VTel whether Walter Hewlett was related in any way to the Hewletts of the Hewlett-Packard Corporation family,” which was confirmed by a company lawyer. VTel finally acknowledged that Hewlett in fact had “substantial gross revenues for each of the three relevant years,” the FCC reported in its notice of apparent liability for forfeiture in 2011. The 17-member Hewlett family is the 119th wealthiest family in the country , with a net worth of $2.3 billion in 2015, according to Forbes magazine’s annual “America’s Richest Families” survey. VTel fought the FCC’s effort to impose a penalty for submitting false information, arguing the disclosure rules were unclear and it was merely following its lawyer’s interpretation of the rule. In the end, the FCC determined that Hewlett’s income was not enough to offset the cap on bidding credits, and, further, knocked $9,000 off the original proposed forfeiture, saying it was not required to exact a penalty “for every apparent violation we investigate,” according to the FCC’s final forfeiture order of last December. OWNERSHIP CHANGES V Tel had more success when pushing through approval changes in its corporate ownership structure with the state’s Public Service Board in 2012. Nearly three years ago, the controlling interest in the Springfield-based telephone, cable and Internet company passed to Guite’s yet-unborn heirs following a speedy approval without a public hearing by the Vermont Public Service Board, according to records with the state. In the fall 2012, Vermont National Telephone Co., the parent company of Vermont Telephone Co. and affiliates VTel Wireless Inc., VTel Data Networks and real estate company Four Winds Farms Inc., asked Vermont’s Public Service Board to approve the transfer of majority control of the parent company to the J. Michel Guite 2011 Descendants’ Trust. According to VTel’s application for stimulus funds to the Rural Utilities Service in 2010, the J. Michel Guite 2011 Descendants’ Trust is “a generation skipping trust, the owner/beneficiaries for IRS tax purposes being the children of the children.” Neither of Guite’s two adult children have children. Norman H. Koch, who has worked at Vermont Telephone Co. for more than three decades, is trustee of the Descendants Trust and has sole voting authority on behalf of the Trust, according to the funding application. On Nov. 28, 2012, Vermont National Telephone Co. requested that the Public Service Board, which oversees utilities in the state, “issue a decision without further proceedings” regarding transfer of control of the parent company by Dec. 15, 2012 — only 11 working days away — because “a significant gift tax exemption under federal gift tax laws is expected to expire and return to a lower level after the end of the year.” On Nov. 29, 2012, one day after Vermont National Telephone Co. requested expedited approval from the Public Service Board for transfer of control, Vermont’s Department of Public Service advised the Public Service Board that it supported the transfer of control “without the need for hearings or further proceedings.” The department’s own review of Vermont National Telephone Co.’s proposal for transfer of control concluded it was consistent with promotion of the public good under the relevant Vermont statute. The Public Service Board agreed. “Section 107 of Title 30 (of the Vermont Statutes) provides that a petition for the acquisition of a controlling interest may only be approved after due notice and opportunity for a hearing. In this case, (Vermont National Telephone Co.) and the Department have both requested that the Board issue a decision without a hearing. The Board has determined that the filings submitted by the parties provide an adequate basis for the requested relief. Accordingly, the Board concludes there is no need to hold a hearing in this docket.” The order was dated Dec. 13, 2012, about two weeks before the exemption under the federal gift tax law expired. John Lippman can be reached at 603-727-3219 or jlippman@vnews.com.