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7 Things Frontier Communications Shareholders Should Be Worried About

By Daniel B. Kline – Mar 25, 2016 at 9:09AM

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The cable and telecom company has a huge opportunity in front of it, but it's facing big risks as well.

Frontier Communications (FTR) shareholders have signed on for what could be a wild ride. The company has experienced a year of falling stock prices as it repositions itself for a much different future. In some ways, that makes the Frontier of today largely irrelevant because the version of the company which will emerge as soon as April 1 looks much different.

Cable is a big part of Frontier's business. Source: author

At the beginning of next month, the company should complete its $10.5 billion acquisition of Verizon's (VZ -2.00%) wireline, broadband, video operations, and FiOS networks in California, Florida, and Texas. That will give Frontier an additional 3.7 million voice connections, 2.2 million broadband connections, and 1.2 million FiOS video connections according to a press release.

That's a huge increase over the 2.5 million broadband customers and 553,700 video subscribers the company finished 2015 with, according to its fourth-quarter earnings report. When you factor in voice, the company ended the year with 3.1 million residential customers and 289,200 business customers -- about 3.4 million total relationships -- or less than half what it will have after the Verizon deal closes.

But while 2016 will bring Frontier big opportunities, it will also mean increased exposure to a number of risks. 

1. It could bungle the integration: While you hope Frontier has learned from its mistakes, the company's last big expansion did not go well. It bought AT&T's (T -1.57%) pay-television, Internet, and landline operations in Connecticut in 2014, and its handling of the 170,000 customers it added led to a record number of complaints, The Hartford Courant reported. Ultimately, the company had to issue a $50 credit to every customer after its actions generated 900 complaints with the state Department of Consumer Protection, 200 with the state Attorney General's Office, and 240 with the state's Public Utilities Regulatory Authority (PURA), according to the paper. That was more PURA complaints in a month than the combined 2014 totals for every other provider in the state. 

2. Users could flee: In Connecticut, despite the rocky beginning, Frontier did not see widespread user defection. That's probably because most of its subscribers did not like their alternatives any better; many of them had fled to the former AT&T service from its traditional cable rivals. In the Verizon markets, that may not always be the case, and any missteps by Frontier could cause a mass exodus. 

3. Cable is a risk in general: While cord-cutting has so far not proven to be the problem many expected it to be, past results may not be indicative of future returns. The concept of dropping cable in favor of streaming services makes sense, and it's possible that as digital options improve, more people will consider doing so.

4. Frontier took on a lot of debt: In order to finance the AT&T deal and now the Verizon acquisition, Frontier has taken on a lot of debt. The company had over $1.1 billion in interest costs alone in 2015, nearly double what it spent the previous year, according to its Q4 earnings report. That's a manageable amount given its cash flow, but should there be a major downturn in business, the leverage could become a problem.

5. It may not be able to afford its dividend: Frontier's ability to keep up with its dividend at current levels could be affected if business takes a major turn for the worse. That would be a compounding problem for its stock were it to occur, because the company's quarterly payout has long been among the most attractive things about its shares.

6. More competition is coming: Frontier is already battling with cable and broadband rivals, but it operates in a space that is attractive to technology companies, too. Alphabet, for example, could choose to roll out its Google Fiber product on a broader basis, or Sony could achieve traction with its cable-like streaming product, PlayStation Vue, which it recently announced it was taking national. It's also possible that an as-yet-unknown player -- like a less-legally challenged version of Aereo -- could emerge to threaten at least a piece of Frontier's business model.

7. Bigger is not big enough: Even after the Verizon deal closes, Frontier will still be a relatively small player in the cable and broadband space. It will be well behind the industry leaders which it has to compete with. Unlike many companies in pay-TV and broadband, Frontier is not operating in long-held markets where it has no competition. Instead, in pretty much every case, it's the interloper -- a second-choice, lower-cost option -- in the markets where it operates.

That leaves it vulnerable to the economies of scale bigger players can achieve. That could lead to them lowering prices to push Frontier out, or it could mean the big boys innovating faster in ways where a smaller player simply cannot keep up.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Kline has no position in any stocks mentioned. He remembers the Shamrock Shake as being better. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Verizon Communications. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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