Frontier Communications (FTR +0.00%) made a huge bet at exactly the wrong time and now it has little hope for a turnaround.
In April 2016, the cable, internet, and telephone company spent $10.54 billion buying Verizon's (VZ +1.76%) wireline, FiOS and broadband businesses in California, Florida, and Texas -- what the company refers to as its CTF assets. That deal brought Frontier an additional 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million FiOS video subscribers, more than doubling its size.
The purchase seemed like a good deal at the time. The CTF properties gave Frontier an increased scale, which in theory would let it reduce overhead-per-customer, and spread out its research and development costs.
That part of the CTF move worked. The company has lowered expenses by about $1 billion, with plans for another $350 million in savings by the middle of 2018. What Frontier did not plan for was that the pay-television and broadband industries would each change in ways that make its long-term success highly unlikely.
Frontier is losing both cable and internet customers. Image source: Getty Images.
What's dragging Frontier down?
The first of Frontier's problems, cord cutting, was already an industry-wide issue at the time the company purchased the former Verizon properties. It's hard to know when the traditional pay-TV industry will hit bottom, or if the cord-cutting trend will stall out at some point, but the phenomenon of people dropping traditional pay television bundles in favor of less expensive streaming services and "skinny bundles" appears to be gaining steam.
Traditional cable companies have compensated for those subscriber losses by adding broadband customers. As you can see on the cart below, the overall industry has more than made up for its pay-TV losses with internet service customer additions.
| Year | Pay TV Customer Gains/Losses | Internet Customer Gains |
|---|---|---|
| 2012 | 170,000 | 2,000,000 |
| 2013 | -105,000 | 2,600,000 |
| 2014 | -125,000 | 3,000,000 |
| 2015 | -385,000 | 3,100,000 |
| 2016 | -795,000 | 2,700,000 |
| 2017 (through two quarters) | -1,065,000 | 1,190,000 |
Data source: Leichtman Research Group.
The problem for Frontier -- and it's a big one -- is that consumers generally have been picking cable companies as their internet service providers, not telephone companies.
"Cable companies added about 3.1 million broadband subscribers over the past year, while Telcos had net losses of about 550,000 broadband subscribers," said Leichtman Research Group President Bruce Leichtman in a press release. "At the end 2Q 2017, cable had a 64% market share vs. 36% for Telcos. The broadband market share for cable is now at the highest level it has been since the first quarter of 2004."
Frontier, as you night imagine, falls into the telco category. In the five quarters since the CTF purchase, the company has not only followed the industry trend of losing net cable customers each quarter, it has also lost internet customers in each period.
Survival mode
Frontier's management has done a good job of managing its financial situation. They've renegotiated loans and credit facilities to buy the company runway, and implemented a reverse stock split to avoid being delisted.
They also cut the stock's dividend from $0.105 per share, where it had been for over two years, to $0.04 per share. A payout cut had to happen -- the company needs to preserve cash -- but it also removed the last attractive feature of the stock.
While management talks about a turnaround, it's unlikely Frontier will be able to buck the trends and stop losing customers. That makes its long-term future uncertain, though its management will likely do a good job making sure it bleeds to death slowly.
It's becoming clearer that spending $10.54 billion to acquire customers who are, over time, likely to drop its services, was a mistake. Frontier may become an acquisition target at some point, but it's hard to imagine any rival paying much of a premium for a declining asset. This is a company that bet big and lost, and there's little hope for it to change its current trajectory.
