The rural telecommunications service provider Frontier Communications Corp. (FTR) will now sell AT&T Inc.’s (T) wireless voice and data products to its customers. The recently inked deal however does not give Frontier the right to sell Apple Inc.’s (AAPL) iPhone.
Reselling AT&T’s product and services reflects Frontiers efforts to expand its business following the acquisition of rural fixed-line operations from Verizon Communications Inc. (VZ) last year. Successful integration in 14 states would provide cost synergies of approximately $600 million by the end of next year. We believe the Verizon lines would lead to higher profits and improved free cash flow.
The three-year deal supports Frontier’s strong portfolio of broadband, voice and satellite TV services. Along with AT&T’s mobile broadband network, Frontier will offer a broad range of smartphones, tablets and applications of the former.
Frontier focuses on generating new revenues through customer retention and wins, new product deployments as well as broadband expansion. Frontier offers voice, high-speed Internet, satellite video, wireless Internet data access, data security solutions, bundled offerings, specialized bundles for small businesses and home offices, and advanced business communications access solutions for medium and large businesses.
The company will resell AT&T’s products in the first half of next year and reach out to the entire population in the 27 states it covers, by the end of the next year. The deal would fuel subscriber growth while retaining the old. It would also boost Frontier’s competitive position against CenturyLink Inc. (CTL), which has the similar deal with Verizon.
We believe Frontier’s ongoing expansion efforts may continue to stretch its borrowing and balance sheet. The company continues to operate with a high debt level of approximately $8.15 billion at the end of the third quarter, up from $7.98 billion at the end of fiscal 2010. Further, intense competition, regulatory pressure as well as integration risks might limit the earnings potential in the upcoming quarters.
While awaiting the initial deployment of AT&T services, we are maintaining our long-term Neutral recommendation on Frontier. For the short term (1-3 months), the stock retains the Zacks #3 (Hold) Rank.
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