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Wednesday, May 13, 2009

Frontier buying rural Verizon lines for $5.3B


NEW YORK (AP) — Verizon Communications Inc. said Wednesday it reached a deal to sell scattered phone service areas outside its main Northeastern and Californian territories for $5.3 billion in stock.

The buyer is Frontier Communications Corp., based in Stamford, Conn. The company focuses on serving small towns and rural areas and will triple in size with the deal.

The deal continues Verizon's strategy of focusing on its core areas, where it is upgrading its phone lines to fiber optics, enabling it to offer TV service and faster Internet access. It sold off its phone lines in Maine, New Hampshire and Vermont for $2.3 billion last year to FairPoint Communications Inc.

The agreement would give Frontier 4.8 million phone lines to residential and small business customers and 1 million broadband connections. Frontier currently has 2.3 million customers.

The sale includes all of Verizon's phone lines in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin as well as some assets in border areas of California.

Verizon shareholders will receive one share of Frontier stock for approximately every 4.2 shares of Verizon stock, depending on the price of Frontier shares at closing, which is expected within a year.

Frontier shares fell 28 cents, or 3.7 percent, to $7.29 in trading Wednesday. Verizon shares fell 65 cents, or 2.1 percent, to close at $29.75.

Verizon is also extracting $3.3 billion from the units before selling them off, by having them pay cash to the parent company and letting them assume debt.

Frontier will issue so much stock to Verizon shareholders that they will end up owning 68 percent of the company.

"This is a truly transformational transaction for Frontier," said Maggie Wilderotter, Frontier's chief executive. "With more than 7 million access lines in 27 states, we will be the largest provider of voice, broadband and video services focused on rural to smaller city markets in the United States."

Frontier also said it is cutting its annual dividend to 75 cents from $1, freeing cash to invest in the acquired areas, including for broadband buildouts. The cut takes its dividend yield to 9.9 percent.

Analyst Christopher King at Stifel Nicolaus noted that buyers of Verizon phone lines have fared badly in the past — FairPoint is struggling with its debt load, and the buyer of Verizon's Hawaiian business has filed for bankruptcy protection. But King said Frontier will actually reduce its debt load relative to its earnings through the transaction.

FairPoint was beset by customer service problems after taking over the Verizon lines, and Sanford Bernstein analyst Craig Moffett said that would make it tougher for the Frontier-Verizon deal to pass muster with state regulators.

Two unions organizing more than 8,000 Verizon workers affected by the Frontier deal expressed "serious concerns," pointing to the problems that followed the FairPoint transaction. The International Brotherhood of Electrical Workers and the Communications Workers of America also questioned Frontier's ability to invest in broadband after assuming extra debt in the deal.

Wilderotter said Frontier would have no problem taking over Verizon's lines, because they come complete with Verizon's billing systems. He also said Frontier is far larger than FairPoint and better equipped to handle and expansion.

Frontier will be taking over 110,000 subscribers to Verizon's FiOS fiber-optic Internet service and 69,000 TV customers. Wilderotter said Frontier will continue to build out FiOS in areas where Verizon has started, to satisfy local TV franchise agreements.

Verizon had aimed to make FiOS available to 750,000 homes by the end of next year in the areas to be sold off, bringing Internet access that is far faster than traditional DSL service and an alternative to the cable TV company for video service.

"Getting these FiOS markets is going to be terrific for Frontier because it allows us to understand video delivery," Wilderotter said. "From there, we can decide whether we want to deploy FiOS or FiOS-like services in other markets."

Frontier also plans to invest in non-FiOS Internet service.

"Rural America can not be left behind from a broadband perspective and we're committed to not have that happen in these markets," Wildrotter said.

The roughly 11,000 workers that support the local landlines will move to Frontier with union contracts intact, Verizon said.

Verizon lines in Connecticut, Delaware, the District of Columbia, Florida, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Texas and Virginia and most of California are not affected by the deal.

The service areas in Florida, Texas and California are "islands" separated from Verizon's main Northeast territories, but CEO Ivan Seidenberg said they're large enough to merit investment, and the company is done with selling off phone lines.



by the associated press

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