Frontier Communications (OTC:FTR) bet $10.54 billion that bigger would prove to be better and that proved to be a mistake.
The company spent that money buying approximately 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million FiOS video subscribers in California, Texas, and Florida (CTF) from Verizon (NYSE:VZ). That deal was supposed to give the company the scale to lower its costs, while also making it more competitive with its much-larger rivals.
"This is a transformative acquisition for Frontier that delivers first-rate assets and important new opportunities given our dramatically expanded scale," said CEO Daniel J. McCarthy in April 2016 when the deal closed. "It significantly expands our presence in three high-growth, high-density states, and improves our revenue mix by increasing the percentage of our revenues coming from segments with the most promising growth potential."
That's true, but paying $10.54 billion for subscribers you slowly lose, does not count as a good deal. Frontier has achieved over $1.25 billion in annual cost savings with another $350 million to come, but it's still losing money and its subscriber counts have fallen in all four quarters since the deal closed.
The bad news keeps coming
In recent months Frontier has slashed its quarterly dividend from $0.105 to $0.04. It did that at roughly the same time it completed a 15-1 reverse stock split. That was a needed move to avoid being delisted, but those two moves together dramatically weakened any reason investors had to hold onto their shares.
McCarthy and the Frontier board of directors made the move not only to avoid delisting, but also to preserve cash.
"As you have seen, we have reduced our quarterly dividend to $0.04 per share, which will make available approximately $300 million of additional cash annually, increasing to $400 million annually in the second half of 2018," the CEO said. "We'll use this to reduce debt at a faster rate, and we are now targeting a leverage ratio of 3.5 times over the next few years."
Those moves are needed because the company followed up a $133 million loss in Q4 2016 by losing $129 million in Q1 2017. McCarthy has proven to be very good at manipulating money and pushing out loan obligations to buy runway, but that won't solve the company's biggest problem, subscriber loss.
Frontier bleeds customers
As noted above Frontier has lost subscribers in every quarter it has owned the former Verizon properties. McCarthy first blamed that on problems related to the transition, then cited a lack of marketing, before most-recently saying that people not paying their bills caused a one-time drop.
Whatever the reason the company lost 144,000 residential customers and 14,000 business subscribers in Q4. It then followed that by dropping another 155,000 residential customers and 18,000 business subscribers in Q1. Those losses can't be explained by cord cutting since the company has not followed the broad industry trend in losing pay-TV subscribers, it has also been losing broadband users.
The road to zero
While McCarthy has excuses for the subscriber drop, the reality is that Frontier has lost the one edge it used to have. As a secondary provider in all its markets competing with much bigger companies, Frontier could lure people to its service with lower prices.
It still uses that tactic, but it's no longer the only game in town. There are a variety of skinny digital streaming pay-TV packages that are cheaper than Frontier and the company also has to deal with consumers willing to cut the cord in favor of non-live TV services like Hulu or Netflix.
Those trends are only going to accelerate with even big cable being more willing to offer more a la carte options or lower-cost bundles. That makes it very unlikely the company will reverse its subscriber trends, which will cause its losses to grow, eventually putting it in a hole too deep to climb out of no matter how clever McCarthy manages resources.