No Verizon Gain Without Shareholder Pain

We've seen how Verizon (NYSE: VZ  ) is making fat cash on its wireless and fiber-optic services, while its old copper wire landlines languish. The telecom giant is getting fed up with that shrinking old legacy, and has started selling it off, piece by piece. That makes lots of sense, and I'm just waiting for AT&T (NYSE: T  ) and Sprint Nextel (NYSE: S  ) to follow suit.

But, guys, did you have to make the transaction so darn complicated and dilutive?

Frontier Communications (NYSE: FTR  ) , which bought a few rural landline segments off Verizon in the 1990s, is picking up an area with 4.8 million local access accounts spread across 14 states, along with 2.2 million long-distance subscribers, and a cool million high-speed data customers. There's even a handful of fancy FiOS fiber optic accounts thrown in for good measure.

This move will triple Frontier's customer base, which will jump from 2.3 million accounts to about 7 million if and when the deal closes later this year. For Verizon, that's a drop in a bucket holding 35.2 million land lines today. Verizon's wired markets will gain tighter focus around the attractive FiOS service. "All of Verizon's remaining local landline operations have high concentrations of FiOS in more densely populated markets," said Verizon CEO Ivan Seidenberg.

Seidenberg added that "This transaction is an attractive way to add value through a special distribution to our shareholders." OK, Ivan, but is it worth the dilution? Concurrent with the deal, Verizon shareholders now own over 68% of Frontier.

It's predominantly a stock-based transaction wherein Frontier gives Verizon's shareholders about one freshly minted Frontier share for every 4.2 shares of Verizon stock. Verizon itself gains $3.3 billion of value from cash distributions, debt securities, and Frontier's assumption of some debt associated with the acquired assets. Verizon spins off the operations in question, which then immediately merge into Frontier. Snip, snap, all done. The company makes a quick buck, but I'm not so sure about its shareholders.

This reminds me of when Disney (NYSE: DIS  ) sold off some radio assets to Citadel Broadcasting a couple of years ago. We Disney shareholders got 0.0768 shares of Citadel for every piece we owned of Mickey. Fine. But the stock tanked immediately, and has lost about 97% of its value since then. Thanks for the free shares, Disney -- but they came at a cost. The deal reduced my core House of Mouse holdings by 1.35%, and I would've preferred no dilution into a new business in favor of an honest-to-goodness cash deal, even if the purchase price tag might have appeared lower when the deal was announced.

Citadel and Frontier share a couple of important traits: Both came up with obtuse spin-off-and-merge dances of some kind. Hefty debt loads change hands at the closing. And their market caps are smaller than the price paid for their new assets.

I see no reason why this transaction would work out better for Verizon's owners than the radio deal did for Disney holders. Feel free to tell me why I'm wrong (or right) in our CAPS comments system. Your fellow investors will appreciate the input.

Further Foolishness:

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Fool contributor Anders Bylund owns shares in Disney and a pitiful pittance of a Citadel Broadcasting position, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On May 14, 2009, at 10:37 PM, bigjohnson2 wrote:

    i can't comment on selloff of cu phone lines, i certainly can comment on verizon. i've been after the idiots to "install" a dsl access for me for years. never got any satisfaction from the central office idiots in sales. my next door neighbor, associated with construction, gave a name and number to me to call setting up dsl access. i did. ten days later i had access.

    as a company, they must be one of the greediest

    i have ever dealt with. their socalled offers for digital tv (several xm sattelite and other radio channels counted in), phone (freedomvalue?) and internet (dsl, low speed) do not inform the customer of all the extra costs for so-called services and equipment: surprise!

    sell verizon!

  • Report this Comment On July 28, 2009, at 2:01 PM, davideldred wrote:

    you are right about verizon not to mention 70 percent of

    the employees will be retiring because frontier does not

    offer lump sum retirement and the land lines are in BAD shape this is a bad deal for frontier verizon is being sued by the fcc for failure to fix lines on time what is frontier going to do with a tenth of the employees..

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