Doug on IP Comm – An independent voice on VoIP, telecom, and IP Communication

Frontier picks up 4.8 million access lines from Verizon

Posted on: May 13, 2009

Frontier Communication is buying 4.8 million access lines and the related business assets from Verizon in an all-stock deal worth $8.6 billion.

My head hurts parsing through the implications.

Pending regulatory approval, Frontier will become the largest “pure rural” communications service provider and (more importantly) the nation’s fifth largest ILEC with more than 7 million access lines, 8.6 million voice and broadband connections, and 16,000 employees in 27 states. Frontier will offer broadband, new bundled services and expanded technologies – whatever THAT means – to customers across its expanded geographic footprint.

Frontier will acquire Verizon access lines in Arizona, California, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, Wisconsin and West Virginia.  Assets in those regions include the aforementioned 4.8 million access lines, along with 1.0 million High-Speed Internet customers, 2.2 million long-distance customers, 164,000 DirecTV customers and 69,000 FiOS video customers.

Under the T&C’s of the agreement, Verizon will create “SpinCo” for the local exchanges and related business assets in the 14 states.  SpinCo will be spun-off to Verizon shareholders and simultaneously merged with and into Frontier.

Frontier says the combined entity will have a strong balance sheet and greater cash flow generation capability; a FY 2008 combined company would have had revenue in excess of $6.5 billion, EBITDA of approximately $3.1 billion, free cash flow of approximately $1.4 billion and would have had leverage of 2.6 times EBITDA at December 31, 2008.  Frontier expects to get cost synergies (i.e. savings/economies of scale) of around $500 million annual, representing 21 percent of SpinCo’s cash operating expenses, coming from leveraging Frontier’s existing network and IT infrastructure and its corporate admin.

Sweetening the pot for investors, Frontier will pay an annual dividend of $0.75 a share to its shareholders, representing an annual yield of around 9.9 percent based upon its stock closing price of $7.57 at COB on May 12.

SpinCo is coming with a debt of around $3.3 billion in a combination of newly issued debt as well as assumed debt from the entites that make it up.  Verizon shareholders will get shares of Frontier common stock in connection with the merger in an amount to be determined at closing, but with a value of around $5.25 billion and with a stock price not to be lower than $7.00 or higher than $8.50.  Depending on how the deal goes down, Verizon shareholders will end up owning between 66 to 71 percent of the new company and Frontier will end up with between 29 to 34 percent.

Frontier currently provides phone, video, Internet and broadband services to more than 2 million customers in 24 states, including 11 of the states that are part of the agreement announced today.

But but but, what does it MEAN?  It has different implications for the two companies. First, let me get Verizon’s side of the story posted…

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