Frontier CEO Dan McCarthy. Image: Frontier Communications.
For many investors, Frontier Communications (FTR) gets the most attention because of its high dividend yield. Yet the budding telecom has worked hard to expand its presence across the nation, with its pending acquisition of assets from Verizon Communications (VZ 0.88%) potentially adding even more to its reach. In its most recent conference call, CEO Dan McCarthy talked about what Frontier has in store for the future. Let's take a closer look at five key things McCarthy said and how they could affect shareholders going forward.
"We completed execution of the financing plan for the acquisition and received regulatory approval from both the SEC and the State of Texas."
Any acquisition can become a massive undertaking, and Frontier Communications has had to juggle efforts on multiple fronts to get its Verizon deal done. On one hand, Frontier executed a combination of stock and bond offerings to get the money together to pay Verizon for the $10.5 billion deal. On the other, Frontier had to overcome several regulatory hurdles, with the Federal Communications Commission and various state agencies getting to weigh in. McCarthy noted that Frontier has made good progress, and since the call, Frontier got good news from a California administrative-law judge on what could be the last obstacle to the deal.
With a favorable proposed decision in the pipeline, Frontier hopes for final approval from the California Public Utilities Commission following the comment period that runs through Nov. 20.
"We now have completed all integration project plans that detail all responsibilities and critical paths in transitioning the network traffic from Verizon's network onto ours."
The worst thing that can happen after an acquisition is for service to fail. Accordingly, Frontier has worked hard to make sure the process goes smoothly, and McCarthy said the company went through its first mock data conversion process. With several more tests to go before doing the real conversion, Frontier hopes to find potential trouble spots and solve them before they can become hassles for existing Verizon customers. Frontier has learned from past acquisitions how important it is to keep customers satisfied, and its efforts on this massive transaction are more important than ever.
"In terms of operational readiness, our teams are ... preparing to train and onboard the transferring Verizon team members at close."
Frontier isn't just buying assets; it's also taking on vital employees associated with operations in California, Florida, and Texas. Frontier has worked closely with unions representing those employees, including the Communication Workers of America and the International Brotherhood of Electric Workers, and the telecom company hopes the transition for workers will be a positive one as well. Frontier has worked with unions to make sure staffing needs at certain locations match up with available personnel. In the long run, maintaining a solid relationship with workers and labor groups can prevent substantial problems down the road.
"We continue to anticipate significant synergies as we eliminate allocated costs from the operations and take advantage of Frontier's lower cost structure."
The key to making the Verizon deal work is for Frontier to offer service at lower cost. McCarthy remains confident that the deal will add 30% accretion to Frontier's leveraged free cash flow per share in the first full year after the transaction closes, and he sees the resulting favorable effect on its dividend payout ratio potentially helping to support healthier dividends in the future. In combination with the efforts it is making elsewhere in its network, Frontier expects the Verizon assets to be worth more to the company than it's paying for them.
"When you combine all the things that we're investing in to be ready for these three states and you apply them to our historic properties, you get a real opportunity to make some substantial changes."
Keeping former Verizon customers happy is the obvious top goal for the acquisition, but Frontier also expects to learn things it can use for its existing customer base. For instance, McCarthy said Verizon has provided greater self-service opportunities to customers in managing accounts and services through multiple methods. As Frontier catches up, its existing customers will also benefit from those new capabilities, and the company hopes that will be an even bigger win from a customer-service angle going forward.
Frontier Communications is working hard to get the Verizon deal done, and it has succeeded on a number of important fronts. With just a little further to go, Frontier is hopeful that its new acquisition will make a big difference in its results going forward.
