Verizon Drops Rural Assets, Frontier Picks Them Up

May 13th, 2009 by · 5 Comments

Verizon (NYSE:VZ, news, filings) announced today that it will divest various wireline assets in 14 states, with Frontier Communications (NYSE:FTR, news, filings) doing the acquiring.  As with the Fairpoint deal in northern New England, these are predominantly rural areas.  The geographical spread this time, however, is immense.  It includes all Verizon territories in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin as well as a few in California.  In terms of subscribers, it looks like about 13-14% of all of Verizon’s access lines.  Once complete transaction will triple the size of Frontier’s subscriber base to some 7 million, if my math is right.  11,000 Verizon employees will become part of Frontier, with their union deals intact of course.

Basically, while 110,000 FIOS customers do go along with the deal, what Frontier is acquiring is the places FIOS isn’t ever likely to go.  That will leave Verizon much closer to where it wants to be:  a company with three lines of business each of which is well positioned.  Verizon Business for the internet backbone and corporate customers, Verizon Wireless for obvious reasons, and a consumer wireline business that will eventually have FIOS to almost every doorstep it passes since it only passes through populated areas.  They will have handed off their copper to die in other hands, after generating cash flow of course.

And the price?  Hmmm, I’ll let someone else calculate that, it appears they got creative since the banks weren’t going to help – Verizon being Verizon they don’t actually need much help if they really want to do something.  It looks like Verizon shareholders get $5.3B in Frontier stock plus $3.3B in a combination of cash and debt securities in some form, but there are lots of details in there.  Of course, that much stock means that Verizon shareholders will own the majority of Frontier, so in a way this is more like a spinoff with a controlled landing pad than an asset sale.

Will the FCC and DOJ approve this deal given Fairpoint’s troubles?  Well, Verizon isn’t playing up Frontier’s “highly successful track record of acquiring, operating and investing in rural telecommunications properties”.  While I don’t doubt Frontier has done well, I’ll bet there will be some grumbling over in Washington and it will take the form of doubt in its ability to absorb this much.  After all, that’s a heck of a lot of turf that Verizon isn’t going to be looking for broadband stimulus funds to reach.  And since it won’t be theirs any time soon (at least a year), neither will Frontier – so much for universal broadband.

However, other than that, it’s hard to say that Verizon divestitures are going to damage competition where there already wasn’t much anyway.  Will it go through?  I look forward to lots of grumbling first.  Like I said, that’s a lot of turf, and those are a lot of PUCs that get to grandstand a bit.  At least now we can be sure they aren’t going to buy Qwest!  Not all of it anyway.

Let the media frenzy begin…

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Categories: ILECs, PTTs · Mergers and Acquisitions

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5 Comments So Far

  • Rob Powell says:

    Oops, sorry all, that was Frontier of course, not Fibertower. I typo’ed the ticker in one of my databases, FTR, FTWR…

    • John Garvin says:

      I actually conducted a LinkedIn survey asking telecom professionals if they were concerned about the deal, and so far it looks like small business owners are the ones who are most feeling the pinch.

      Let’s see if the unions will allow this to pass.

  • Peter Rad says:

    Rob, you missed the MarketWatch article that described the SpinCo.

    “Frontier will be merged with a separate, newly formed entity known as SpinCo, which will be spun off to Verizon’s shareholders. …SpinCo will carry approximately $3.3 billion of debt consisting of a combination of newly issued debt as well as assumed debt. Verizon will receive about $3.3 billion of cash or debt relief.”

    Looks like a worse deal than the Fairpoint one. Where are the regulators?

  • Rob Powell says:

    Ah, interesting – the structure of the deal is kind of complex eh? I have a strong feeling that the regulators aren’t going to sleep through this one actually.

  • Ray says:

    I am a Verizon employee, My current tiltile is Cable maint…I am trained in the installation and repair of FIOS…
    I just reached my 20 yr. mark last month..I’m in NJ so for now I or we are not part of this Spin…
    Makes me and my co-workers worry. Verizon would never want anyone to feel at all secure…..If frontier stock is under 9 $ per why would I only get 1 frontier stock for every 4.2 verizon stock….

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