Verizon to buy Frontier Communications
Wall Street Journal reported today that Verizon is on the verge of buying Frontier Communications for as much as $7 billion in a deal that would bolster the company’s fiber network to compete with rivals notably AT&T. With a market value of over $7 billion, Dallas, TX based Frontier provides broadband (mostly fiber optic) connections to about three million locations across 25 states. Frontier is in the midst of upgrading its legacy copper landline network to cutting-edge fiber. Rising interest rates sparked fears among investors, however, that the business would run out of cash and not be able to raise more before completing those upgrades. Frontier has a 25-state footprint and serves largely rural areas. It reported sales of $5.8 billion in 2023, with about 52% of total revenue from activities related to its fiber-optic products and bills itself as “largest pure-play fiber internet company in the US.”
An all-cash deal between the two companies could be announced as soon as Thursday, a person familiar with the negotiations told Bloomberg.
Fiber M&A has heated up as telecom companies and financial firms pour capital into neighborhoods that lack high-speed broadband or offer only one internet provider, usually from a cable-TV company. New fiber-optic construction is expensive and time-consuming, making existing broadband providers attractive takeover targets.
Verizon, with a market valuation of around $175 billion, will be under pressure from shareholders to justify any big purchase after the company paid more than $45 billion to secure C-band 5G wireless spectrum licenses and spent billions more to use them. Executives have said they are focused on trimming the telecom giant’s leverage to put it on a firmer financial footing.
Verizon, the top cellphone carrier by subscribers, has faced increased pressure from competitors and from cable-TV companies that offer discounted wireless service backed by Verizon’s own cellular network. Faced with slowing wireless revenue growth and an expensive dividend, Verizon has invested in expanding its home-internet footprint. It has both 5G fixed wireless access (FWA) and its Fios-branded fiber to the premises network.
T-Mobile is the only major U.S. cellphone carrier that lacks a large landline business. Since its 2020 takeover of rival carrier Sprint, the company has focused on 5G dominance and succeeded in growing its cellphone business faster than rivals. That network has also linked millions of customers to its fixed 5G broadband service, which offers cablelike service over the air. T-Mobile’s strategy has shifted in recent months, however, as the company dabbles in partnerships and wholesale leasing agreements with companies that build fiber lines to homes and businesses. The wireless “un-carrier” in July agreed to spend about $4.9 billion through a joint venture with private-equity giant KKR to buy Metronet, a Midwestern broadband provider.
Photo Credit: Jeenah Moon/Bloomberg News
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A deal for Frontier would be a round trip of sorts for some of the network infrastructure that Frontier bought from Verizon in 2016 for $10.54 billion in cash. Frontier later filed for Chapter 11 bankruptcy in April 2020 as it burned through cash and was burdened by a heavy debt load. It emerged as a leaner business in 2021 with about $11 billion less debt and focused on building a next-generation fiber optic network.
Frontier’s biggest investors today include private-equity firms Ares Management and Cerberus Capital Management. The company drew the attention of activist Jana Partners last year, which built a stake in the business. Jana delivered a letter to Frontier’s board late last year asking the company to take steps immediately to help reverse its sinking share price, including a possible outright sale.
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AT&T has focused on expanding its fiber network since spinning off its WarnerMedia assets in 2022 to Warner Brothers Discovery. AT&T has 27.8 million fiber homes/businesses passed, growing at ~2.4 million per year, plus more locations passed via its Gigapower joint venture. AT&T’s fiber internet business is expected to contribute to an increase in consumer broadband and wireline revenue. AT&T expects broadband revenue to increase by at least 7% in 2024, which is more than double the rate of growth for wireless service revenue. In contrast, Verizon only has about 18 million fiber locations, growing at about 500,000 per year.
Other recent deals in the fiber transport market sector include the $3.1 billion acquisition, including debt, of fiber provider Consolidated Communications in late 2023 by Searchlight Capital Partners and British Columbia Investment Management.
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It’s All About Convergence (fiber based home internet combined with mobile service):
Speaking at a Bank of America investors conference today, Verizon’s CEO for the Consumer Group Sowmyanarayan Sampath said when Verizon bundles Fios with wireless, it sees a 50% reduction in mobile churn and a 40% reduction in broadband churn. He said they don’t see the same benefits with FWA. Sampath was scheduled to speak at the Mobile Future Forward conference tomorrow, but he canceled at the last minute, which may be a sign that this deal for Frontier is imminent.
The analysts at New Street Research led by Jonathan Chaplin said Verizon’s rationale for the purchase is “convergence baby.” They wrote, wrote, “Verizon seemed complacent. No longer.” Indeed, Verizon CEO Hans Vestberg was challenged on the company’s second quarter 2024 earnings call by analysts who questioned whether Verizon had a big enough fiber footprint to compete in the future. The New Street analysts said Sampath’s comments today “marked a shift in rhetoric from: ‘convergence is important, but we can do it with FWA.”
The analysts at New Street wrote today, “We have been arguing for a couple of years that all the fiber assets would eventually be rolled up into the three big national carriers (AT&T, Verizon, T-Mobile). We always knew that if one carrier started the process, others would have to follow swiftly because there are three wireless carriers and only one fiber asset in every market with a fiber asset.”
Other potential fiber companies that the big three national carriers might be eyeing include Google Fiber, Windstream, Stealth Communications and TDS Telecom.
After its annual summer conference in August in Boulder, Colorado, the analysts at TD Cowen, led by Michael Elias, said there was a lot of conversation about the wireline-wireless “convergence” frenzy. “We believe convergence is a race to the bottom, but if one player is going in with a slight advantage (AT&T), the others must reluctantly follow,” wrote TD Cowen. In the mid-term they speculated that T-Mobile might look at fiber roll-ups with Ziply or Lumen (formerly or other regional players.
References:
https://www.wsj.com/business/deals/verizon-nearing-deal-for-frontier-communications-9e402bb4
https://www.fierce-network.com/broadband/verizon-rumored-buy-frontier-its-convergence-game
https://finance.yahoo.com/news/verizon-talks-buy-frontier-communications-180419091.html
https://videos.frontier.com/detail/videos/internet/video/6322692427112/why-fiber
The deal combines Frontier’s fiber network into Verizon’s portfolio of fiber and wireless assets, including its Fios offering. Over about the past four years, Frontier has invested $4.1 billion upgrading and expanding its fiber network. Its 2.2 million fiber subscribers across 25 states will join Verizon’s nearly 7.4 million Fios customers in nine states and Washington DC. Verizon plans to build out an additional 2.8 million fiber locations by the end of 2026, adding to Frontier’s 7.2 million sites, the companies said.
Verizon Chief Executive Officer Hans Vestberg said the takeover will allow the company to “become more competitive in more markets” in the US.
The move by Verizon “would mark a much deeper commitment to a fiber broadband strategy and future-proof its high-speed internet footprint with the best long-term medium for delivering the service,” Bloomberg Intelligence analyst John Butler wrote Wednesday after news reports of a pending acquisition. “A deal would put Verizon’s consumer fiber subscribers ahead of rival AT&T by lifting its base to 9.1 million vs. the latter’s 8.8 million.”
The boards of Verizon and Frontier have approved the deal, which is expected to close in about 18 months if shareholders and regulators agree to it. Verizon also reaffirmed its full-year guidance in the statement. The transaction is expected to be accretive to revenue and adjusted earnings before interest, tax, depreciation and amortization growth rates upon closing, according to the companies. It’s expected to be accretive to earnings per share starting in 2027. Verizon sees at least $500 million of run-rate cost synergies by the third year.
Frontier initiated an internal review of its business earlier this year. The company has faced pressure from activist investor Jana Partners to improve its returns. It reported sales of $5.8 billion in 2023, with about 52% of total revenue from activities related to its fiber-optic products.
In 2015, Verizon sold parts of its landline phone business in California, Florida and Texas to Frontier for $10.54 billion. Frontier filed for Chapter 11 bankruptcy in 2020 as debt piled up after years of losses in its wireline telecom business. It emerged from bankruptcy the following year and focused on building out its fiber network to better compete against cable and wireless companies.
https://finance.yahoo.com/news/verizon-buy-rival-frontier-communications-100550995.html
Verizon’s $20 million move to acquire Frontier Communications as part of an effort to expand and scale its convergence strategy is considered a compliment at Comcast.
“That’s validation of what we’re doing. People are coming our way,” Comcast CFO Jason Armstrong said Thursday at the Citi Investor Conference when reacting to this morning’s deal.
“If you believe we’re headed toward convergence… we’re sort of the original innovators of convergence, he said. “I think we have an incredible hand to play in convergence.”
While it’s true that Comcast and other cable operators have had their share of fits and starts getting into the mobile business, the operator’s latest approach – an MVNO deal with Verizon paired with the deployment of a large Wi-Fi network and targeted CBRS spectrum rollouts – has been successful with respect to adding heaps of mobile lines.
Comcast’s Xfinity Mobile unit added 322,000 mobile lines in Q2 2024, raising its total to 7.19 million. US cable’s share of total mobile phone net adds (both postpaid and prepaid) was roughly 54% in the period, according to a MoffettNathanson analysis.
Armstrong also held that Comcast, with 63 million homes passed by its wireline networks and DOCSIS 4.0 upgrades in motion, continues to maintain a sizable network coverage advantage compared to the current, combined fiber footprints of AT&T, T-Mobile and Verizon, even when factoring in the proposed Frontier acquisition.
“If you take their plans for coming years through JVs and acquisitions and organic plans to build, it adds up to roughly on par to where we are in the next several years,” Armstrong said. “When you see wireless companies investing aggressively in fiber, they’re telling you that… the broadband relationship may be center of the plate in the overall relationship.”
Comcast, like some of its cable industry peers, is using mobile to boost its broadband business. Though cable home broadband losses have stabilized a bit (Comcast lost 120,000 broadband subs in Q2, fewer than what analysts were expecting), cable operators are still struggling to return that key part of the business back to subscriber growth.
Much of that pain has come from fixed wireless access (FWA) competition from T-Mobile, Verizon and, to a lesser degree, AT&T. Comcast, Armstrong stressed, is trying to segment that part of the market with tiers and options that deliver speeds and pricing that’s similar to what FWA rivals have in the market.
Armstrong said Comcast expects FWA to maintain a “sizable niche” in the broadband market, governed by growing consumer data usage patterns. But fiber is still viewed as the long-term broadband competitor.
https://www.lightreading.com/broadband/verizon-frontier-deal-a-validation-of-our-convergence-strategy-says-comcast-cfo