Telecommunications giant Verizon Communications plans to take over smaller player Frontier Communications in an all-cash deal valued at $20 billion, as Verizon seeks to bolster its fiber footprint to battle its biggest rival, AT&T.
According to Verizon, Frontier operates the “largest pure-play fiber internet” network in the U.S. with 2.2 million fiber subscribers across 25 states. Over the past four years, Frontier has invested $4.1 billion upgrading and expanding its fiber network, and now generates more than 50% of its revenue from fiber products. That will add to Verizon’s approximately 7.4 million Fios connections in nine states and Washington, D.C., the telco said.
Together, Verizon and Frontier operate fiber networks passing more than 25 million premises in 31 states and D.C., and both companies expect to increase their fiber penetration between now and the deal’s closing.
The deal would return to Verizon assets it had previously sold to Frontier. In 2016, Verizon completed a $10.5 billion deal to sell TV and internet landline business in California, Texas and Florida to Frontier. And in 2009, Verizon sold landline businesses in 14 states in “predominantly rural areas” to Frontier for $8.6 billion.
Verizon’s proposed takeover of Frontier is relatively small: Frontier would add about 4% to Verizon’s revenue and adjusted earnings before interest, taxes, depreciation and amortization. At least one Wall Street analyst was downbeat on the deal. “For Verizon, this would be a bold step in the direction of convergence… which is, in our view, an absolutely atrocious idea,” Craig Moffett of MoffettNathanson research wrote in a research note Thursday. Verizon’s current fiber footprint covers a small fraction of the U.S., and “Frontier wouldn’t materially change that,” the analyst noted.
“There is simply no path forward for Verizon to cobble together a meaningful wireline coverage map, and a national wireless network basing its strategy on convergence with wireline fiber that is available to just a small fraction of American homes, with no conceivable path to broad coverage, is an awful strategy,” Moffett wrote.
Verizon and Frontier expect the deal to close in approximately 18 months, subject to approval by Frontier shareholders, regulatory approvals and other closing conditions. The agreement has been unanimously approved by the Verizon and Frontier boards, they said.
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Verizon chairman and CEO Hans Vestberg, in announcing the deal Thursday, said the Frontier deal “will build on Verizon’s two decades of leadership at the forefront of fiber and is an opportunity to become more competitive in more markets throughout the United States, enhancing our ability to deliver premium offerings to millions more customers across a combined fiber network.”
Nick Jeffery, president and CEO of Frontier, added that the pact is “a vote of confidence for the future of fiber. I am confident that this delivers a significant and certain cash premium to Frontier’s shareholders, while creating exciting new opportunities for our employees and expanding access to reliable connectivity for more Americans.”
Verizon said it expects the Frontier acquisition to be accretive to Verizon’s revenue and adjusted earnings growth rates. Verizon anticipates seeing at least $500 million in annual cost synergies by the third year of the deal from “benefits of increased scale and distribution and network integration.”
Under the terms of the agreement, Verizon proposes to acquire Frontier for $38.50 per share in cash, representing a premium of 43.7% to Frontier’s 90-day volume-weighted average share price on Sept. 3 (the last trading day prior to media reports regarding a Verizon acquisition of Frontier).
