Frontier Communications Corp. FTR has received the final approval from California Public Utilities Commission (CPUC) for its proposed acquisition of leading wireless carrier Verizon Communications Inc.’s VZ local wireline operations in California, Florida and Texas.
The company has already received all other necessary regulatory clearances, including those from the Federal Communications Commission (FCC), the U.S. Department of Justice (DoJ) and the Public Utility Commission of Texas. We remind investors that, in 2009, Verizon had divested 4.8 million rural phone lines to Frontier Communications in a stock and cash deal worth $8.6 billion.
The Deal
Frontier will buy Verizon’s local wireline operations in the three states for a consideration of $1.54 billion. These operations serve 3.7 million voice customers, 1.2 million video customers and 2.2 million broadband connections. Half of the network runs on high-quality fiber-to-the-home (FTTH) technology. Once obtained, Frontier will be able to use them as part of its service expansion drive and leverage them in providing off-net capabilities to its customers.
A Strategic Move
In July 2015, Frontier Communications revealed that its planned acquisition of Verizon’s wireline assets will help it ensure rapid transition without any service interruptions to its customers.
We note that an important constituent of this transition process is the transformation of Verizon's operations into Frontier's present Operations Support Systems (OSS) software and billing systems. Frontier, at present, serves in excess of 3 million customers via its OSS software and considers it functionally equivalent to Verizon's OSS.
We believe the Verizon deal will drive stronger revenues at Frontier, prove accretive to its free cash flow growth and help the company retain its dividend sustainability. On the other hand, Verizon’s decision to sell its wireline assets is an indication that the company seeks to strengthen its cash position in order to repay debts and meet future investment commitments. Verizon will meanwhile concentrate on the wireline business in the East Coast and focus on the expansion of FiOS broadband and high-speed Internet business in the region.
The Bottom Line
Apart from the Verizon agreement, Frontier recently enhanced its Ethernet portfolio and crafted an attractive plan to lure customers in the business segment. Moreover, Frontier recently teamed with TiVo Inc. TIVO and Amazon.com Inc. AMZN to introduce its Over-the-Top (OTT) service named ‘FreedomTV’, which is particularly aimed at the millennial population. With these strategies in place, it is clear that the firm has its eye on sturdy organic growth. However, it remains to be seen whether these approaches can add flair to its operations and improve its current position in the market.
Both Frontier Communications and Verizon carry a Zacks Rank #3 (Hold).
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