In an $8.6 billion stock and debt transaction, Stamford-based Frontier Communications Corp. is acquiring rural telephone operations in 14 states from Verizon Communications Inc. that trace their heritage to GTE Corp., which was once based in Stamford.
Frontier picks up 11,000 employees and 4.8 million customer access lines from Verizon, more than doubling the size of its business, with 1 million customers receiving high-speed Internet connections. Frontier and the Verizon accounts produced $6.5 billion in combined revenue last year.
Verizon has long been rumored to be interested in offloading a large chunk of its rural telephone business, with Frontier”™s predecessor company Citizens Communications having been cited as a potential acquirer on multiple occasions. The Verizon book of business has less than 40 residences on average per square mile; less than a tenth the housing density of Fairfield County.
Both Verizon and Frontier have suffered losses of access lines in their territories, but the CEOs of Verizon and Frontier expressed confidence Frontier could reduce customer churn.
“We are actually convinced that (Frontier) will take these properties to a higher level of performance,” said Ivan Seidenberg, CEO of New York City-based Verizon, in a conference call with investment analysts in mid-May.
In addition to federal clearance, Frontier must obtain approval from utilities regulators in 10 states. Frontier plans to raise $3.2 billion in debt to complete the deal, which because of the additional revenue it is gaining would actually reduce its current debt leverage ratio.
At that point, Frontier would become the fifth-largest incumbent local exchange carrier in the nation with more than 7 million access lines and 16,000 employees in 27 states.
“We approached Verizon,” said Maggie Wilderotter, CEO of Frontier. “We felt it was time for us to get in front of Ivan Seidenberg and show him what we could do for these properties ”¦ In the first three years we”™re going to do a substantial amount of investment for high-speed Internet and broadband reach.”
The deal comes even as the Obama administration pledges to spend at least $1 billion to increase broadband access in rural areas. Currently, about six in 10 of the Verizon customer accounts have access to broadband; Frontier is also inheriting 69,000 Verizon customers who are enrolled in the company”™s FiOS home fiber optic broadband service in Indiana, Oregon and Washington. Frontier sells satellite TV service through the DISH Network, but does not offer cable TV.
“Frankly we are very excited about the FiOS properties that we are inheriting,” Wilderotter said, expounding on the deal last week at an investment conference in Boston sponsored by JPMorgan Chase. “We”™ve been actually building out a number of the Frontier markets today to be in a position to offer network-based video if in fact we felt it was financially viable to do ”¦ One of the great benefits of this transaction is we”™ve gotten network-based video systems at a really good price, and we are going to learn a lot in those markets and starting to run those from a video perspective, and then we”™ll be able to take that learning and translate it into other markets.”
The deal would also displace New York as Frontier”™s biggest market by West Virginia and Indiana. Frontier has its operational center in Rochester, N.Y.
Frontier did not immediately provide specifics on potential job cuts, saying it would prune $500 million in overlapping costs from the combined operation with initial cuts likely targeting administrative and call center operations. Wilderotter said the company inherits 30 union contracts spread out over time, whose membership is largely comprised of company technicians.
“We will ”¦ honor the union contracts that we are inheriting in these markets,” Wilderotter said. “We have made a commitment not to laying off any frontline employees for an 18-month window.”
At the same time, Frontier will look to avoid the straits Fairpoint Communications Inc. found itself in after acquiring Verizon landlines in northern New England 14 months ago. Earlier this month, the state of New Hampshire reportedly committed $50 million to bolster Fairpoint”™s balance sheet after customers complained they could not get through to a call center.
In the first quarter, Frontier revenue dropped 5 percent to $538 million as the customers dropped nearly 38,000 access lines on a net basis. Frontier earned $36 million for the quarter, off 20 percent from a year ago.
