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.

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