PJR02 (33.31)

Frontier's Pending Merger

October 07, 2009 – Comments (0) | RELATED TICKERS: FTR , VZ

As a shareholder of Frontier, I recently received notice of Frontier’s Stockholder meeting on October 27th and the merger details between Frontier and Verizon/Spinco. This merger will involve Frontier acquiring 4.8 million access lines from Verizon in 11 states. The ‘merger’ is massive, more than doubling the size of Frontier, and handing 66-71% of the company to current Verizon shareholders (heavily diluting the current shares of Frontier that exist) and lowering the dividend.

Since this deal was first announced a few months ago, I have yet to see any positive aspects. Frontier touts that they will become the nation’s largest solely rural and mid-size city telecommunications provider. Sounds fancy and all, but not sure if it’s the best call for a company that has built it’s reputation on providing advanced services  (broadband for example) to rural markets.

A good example of Frontier’s commitment to broadband and more advanced technologies can be seen in their own report comparing percentage of customers with broadband or other high speed data products between Frontier and the Spinco territory. Frontier claims an impressive 92% of customers have access to broadband, compared with Spinco’s 62.5%. Frontier has (in my experiences) built a reputation of being a phone company that invested a lot of money in infrastructure in rural areas, where most companies don’t care for.

Where I reside in Upstate NY, Frontier will be more likely to take a chance to put DSL in a rural area, long before either Verizon or a cable company, many times being the only broadband provider in a particular area. I like the idea of Frontier trying to obtain additional rural markets, but there comes a point where one is trying to obtain too much.  Even a quarter of what they are currently trying to obtain would be a huge increase in the size of the company.  I feel Frontier will find an infrastructure in much worse shape then it is use to. They will be forced to spend a lot of money to bring Spinco’s equipment up to their ‘standards’, or abandon these standards, and run a much different company.

In order to maintain a tax free status, Frontier’s hands will be tied for 2 years after the spin off restricting it from:

-any additional mergers

-any acquisition, issuance, repurchase, or change of stocks (I’m reading to mean they can’t buy back their stocks)

-paying quarterly dividends not to exceed 0.25 per share

I feel these restrictions will affect the company Frontier has been.

Frontier feels it will cut cost by 21% by 2013, allowing much cash savings for further infrastructure improvements and increased dividends down the road. My concerns are the increasing loss of access lines that are killing telecommunications revenue. Frontier feels it will be able to increase broadband subscribers (most likely with federal funds for rural broadband initiatives), however just within frontier territory, revenue has been decreasing by 8.5% a year – over three years this is 25.5% (assuming no increases in line loss due to transition problems or increasing competition from VOIP or other providers), which would be more then the 21% cost savings Frontier expects over those same three years.

Possible winners? DISH Network, who has been increasing subscribers through a partnership with Frontier, a partnership that would extend to the ‘new’ Spinco territory. Helping further promote DISH services. 

Frontier stock price keeps going up, but I can't figure out why people view this as a good thing. Can anybody out there convince me it’s worth voting for?