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What Frontier's Verizon Deal Really Means for Investors and Customers

By Dan Caplinger - Sep 6, 2015 at 8:20AM

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The rural telecom company got approval for its acquisition of assets in three key states, but will it really make a difference to the public?

Image: Pixabay.

Over the years, Frontier Communications (FTR) has gone from a small niche regional rural telecommunications company to a giant with national scope, using a host of acquisitions to boost the size of its network and serve an ever-increasing group of customers to provide a host of different telecom services. In its latest and biggest deal yet, Frontier has aimed at biting off a $10.5 billion hunk of assets from Verizon Communications (VZ 0.28%), and earlier this week, Frontier announced that the Federal Communications Commission had given its go-ahead for the asset purchase, which will include a vast swath of customers in California, Florida, and Texas. Let's take a closer look at the deal and try to figure out what benefits Frontier's existing set of customers can expect from it.

The scope of the deal
Frontier will get a huge set of new customers if the deal gets final approval. Currently, Verizon has about 3.7 million voice connections, 2.2 million broadband connections, and 1.2 million FiOS video connections in California, Florida, and Texas, and Frontier is on track to acquire all of them if the transaction goes through.

When you compare that to the size of the current Frontier operation, it's evident just how big a deal this acquisition would be. As of the end of its most recent quarter, Frontier reported having just over 2.4 million broadband customers, and total residential customer counts were just shy of 3.2 million. Although the company can expect some attrition in any deal, Frontier has a history of doing its best to retain as many of its acquired customers as possible, and doing so will help establish the wisdom of the deal in general.

What customers can expect
The real question is whether customers in those three states will see improving service as a result of the deal. The FCC believed that the answer is yes, according to Frontier, which said in a press release that the government overseer "views this transaction as being in the public interest and benefiting customers in the three acquired states."

In particular, Frontier hopes to give customers the sort of service they haven't seen before. Customer complaints have alleged that Verizon has shown little interest in offering upgraded services to customers in the three states, and so Frontier will "look forward to demonstrating our commitment to broadband investment and deployment" and expects customers there to "benefit from our extensive experience, our high-touch local engagement management model, the focused use of the fiber-rich network, and our active involvement in the communities we serve."

In addition, Frontier thinks that its larger size will benefit even customers who don't live in the three states where it is acquiring Verizon's assets. Frontier said it expects to get higher-speed broadband to three-quarters of a million customers across its network, and it thinks that the larger network will give it more capacity to offer the scale and scope necessary to take on more ambitious customer projects going forward.

Indeed, the prospect of the Verizon acquisition likely played an important role in Frontier's decision to take on a second phase of the FCC's Connect America Fund program. The move will bring in $283 million in revenue from the program, and more importantly, it demonstrates Frontier's overall commitment to improving the lives of those of its customers who live in areas that typically don't attract the full attention of many telecom service providers.

Meanwhile, for shareholders, the best news is that Frontier expects that the deal will only enhance its ability to keep paying a lucrative dividend. Frontier's 8% yield has made some investors nervous, especially given a history that included two major dividend cuts in recent years. Yet executives argue that the Verizon deal will actually be accretive to free cash flow, and that could actually set the stage for further dividend increases over time if the deal is successful.

Frontier Communications hasn't cleared every hurdle in its Verizon deal yet, with the company still needing approval from public utility commissions in Texas and California. Nevertheless, Frontier seems confident that it will get those approvals in time to close the deal by the end of the first quarter of 2016, and once it goes through, customers across Frontier's network should expect to see the impacts of the deal ripple outward during the remainder of the year.

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