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Why Frontier Communications Corp. Shares Soared

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Frontier Communications Corp. (NASDAQ: FTR  ) jumped by more than 10% during intraday trading Tuesday after the company announced it has agreed to acquire AT&T's (NYSE: T  ) wireline business and statewide fiber network in Connecticut for $2 billion in cash.

So what: Considering the assets in the transaction only account for roughly 1% of AT&T's 2013 revenue, it's unsurprising shares of AT&T remained little changed on the news. This will, however, provide AT&T plenty of new cash to pay for its ongoing wireless network infrastructure upgrades.

Frontier, for its part, noted the transaction is expected to be accretive to its adjusted free cash flow per share in the first year following its close. In addition, while there will be no change to Frontier's annual dividend for now, the deal will improve Frontier's dividend payout ratio by more than 5 percentage points over the same period.

Finally, investors are rightly pleased the purchase comes with no dilution to existing shareholders. As it stands, JPMorgan has committed financing for the transaction, and Frontier CFO John Jureller stated in a subsequent conference call his company may look to raise around $1.9 billion in bonds during the second or third quarter next year. 

Now what: While the acquisition will certainly increase the scale of Frontier's business, investors would also be wise to remember taking on even more debt comes with its own added risks. What's more, remember the acquisition is still subject to regulatory approval.

Even so, and though I'm not personally compelled to buy the stock today, Frontier's previous experience with similar transactions leaves it uniquely positioned to ensure this one succeeds. As a result, I see little reason Frontier investors shouldn't be able to look forward to a slow rebound in shares as they continue to collect its massive 8.7% yield.

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9/30/2016 2:34 PM
FTR $4.22 Down -0.04 -0.82%
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JPMorgan Chase CAPS Rating: ****