The deal amps up Verizon's fiberoptic growth. More deals may be coming. By Nicholas Jasinski
Verizon Communications' deal to acquire Frontier Communications is a bet that combining wireless and wired networks will enhance its proposition for consumers and return the telecommunications giant to growth. It's likely only the first of several dominoes to fall.
The all-cash deal announced on Thursday morning values Frontier's stock and net debt at $20 billion, or about nine times next year's expected earnings before interest, taxes, depreciation, and amortization, or Ebitda. Shareholders will receive $38.50 per Frontier share, a 37% premium to its closing price on Tuesday before news reports of the deal broke. Barron's recommended buying the stock at around $14 last summer -- making for a 175% return.
It's a homecoming of sorts for many of the assets that make up today's Frontier. In 2016, Verizon sold its wired operations in California, Texas, and Florida to Frontier for $10.5 billion. Four years later, Frontier went bankrupt. It re-emerged as a public company in May 2021, with an overhauled strategy, new management team, and reset balance sheet.
The company has focused on converting its slow and aging copper-based telecom network to a next-generation network built on fiberoptic cable -- a slow and costly process, but one that has begun to bear fruit in the form of growing revenue and subscribers. Its footprint today covers areas of the Midwest, Texas, and California. Verizon's Fios fiber internet service is concentrated in Virginia and much of the Northeast. The lack of geographic overlap should ease antitrust concerns.
At its core, the deal is a bet on "convergence," a telecom-industry term that seems to come in and out of fashion over the years. On the back end, that means a unified network infrastructure for servicing wireless towers and individual homes with data, voice, and other connectivity. For consumers, it means bundling wireless phone, home internet, TV, and other services under one subscription.
According to Verizon, customers who bundle their wireless service with Fios have a 50% lower churn rate -- the percentage of subscribers who cancel each month -- than wireless-only customers and 40% lower than broadband-only customers. In a slow-growth industry, holding on to your existing subscribers is at least half of the game.
"We will be able to build deeper relationships with our customers," Verizon CEO Hans Vestberg said on Thursday.
AT&T has blazed the convergence trail in recent years, pivoting away from an ill-fated venture in media and refocusing on investment in its wireless and fiber networks. At the end of June, AT&T had some 28 million homes and businesses hooked up with fiber, up by more than two million from a year earlier.
Folding in Frontier would help Verizon narrow the gap: The combined company would reach 25 million addresses with fiber. Verizon had been adding about 500,000 fiber locations annually, while Frontier planned to grow its fiber footprint by 1.3 million in 2024. Verizon's deeper pockets and lower cost of financing could accelerate that buildout, while its marketing machine and retail network may help boost adoption. There are potential cost savings from reduced overhead, capital expenditures, and more.
There may be more dealmaking to come: Lumen Technologies, Windstream, and Google Fiber are among the largest remaining independent owners of fiber networks in the U.S.
A rival bid for Frontier by AT&T or T-Mobile US can't be ruled out, either. Many analysts had higher price targets for Frontier, and the company has activist investors on board. Verizon can afford to pay more. T-Mobile has dipped its toe in fiber investments in recent years, at higher per-location prices.
Telecom investors have been burned by companies' costly M&A adventures time and again, as management teams seek growth by chasing the next hot thing. The shift in strategy was somewhat of a surprise from Verizon, which had been in debt-paydown mode, likely dashing investors' hopes for share repurchases on the horizon. Verizon stock is down 4% since news of the Frontier deal leaked.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
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(END) Dow Jones Newswires
September 06, 2024 21:30 ET (01:30 GMT)
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