Tuesday, March 29, 2016

Frontier Takes Over Friday

No April Fool's Joke. Frontier takes over California, Texas and Florida Verizon territory and wireline network on Friday.

Frontier Communications Corporation was known as Citizens Utilities Company until May 2000 and Citizens Communications Company until July 31, 2008. It is the 4th largest ILEC in the US and also a RLEC (rural exchange carrier) in 28 states, with almost $6B in annual revenue. (Debt is $16B!) Frontier has operations in 28 states with 3.4 million customers, 2.4 million broadband subscribers and 18,600 employees as of September 30, 2015., according to this filing.

As an RLEC, Frontier gets monies from USF and CAF to build out broadband in its rural markets. "Connect America Fund Phase II: The $283 million in CAF Phase II support replaces the $156 million in annual USF frozen high-cost support that Frontier has been receiving pursuant to the 2011 FCC Order. Frontier received one-time true-up payments of $85 million for CAF Phase II support in the third quarter bringing our total CAF Phase II related funding for 2015 to $214 million."

"Following the close of the California, Texas, and Florida acquisition, the product revenue mix will improve, with less exposure to voice revenue declines. California, Texas, and Florida markets add dynamic geographies, over half of households served with advanced fiber-to-the-home network." (FiOS) [source] Frontier is rolling out VDSL2 for best effort 100MB broadband.

"As of September 30, 2015, we were able to offer broadband to approximately 7.9 million households, or 93% of the 8.6 million households in our markets." Broadband revenues prop up Frontier, Wind and C-Link.

Factors that will affect performance going forward include (1) " the effects of increased medical expenses and pension and post-employment expenses; and (2) "our ability to successfully renegotiate union contracts." I think that is why VZ is getting out of the wireline game - unions and pensions. It is certainly why Sprint spun out Embarq (now C-Link). It is something that the cablecos do not have to worry about.

Frontier is a hodge podge of acquisitions from GTE, Citizens, Alltel, Verizon, AT&T and Global Crossing! In 2009, Frontier spent $8.6 Billion to "acquire all wireline assets [of Verizon] in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin, placed into a holding company called New Communications ILEC Holdings."

In 2014, Frontier acquired AT&T's SNET subsidiary, which offered wireline, DSL, U-verse video and satellite TV businesses in Connecticut. It did not happen pretty. However, it does contribute about $253 million per quarter ($121M in biz rev).

Now Frontier is again buying Verizon assets. "The $10.5 billion acquisition is a big move for Frontier.... The company’s current workforce of 19,200 will increase to about 29,200 and its customer base will jump from 3.4 million people to 7.1 million. The move will also boost Frontier’s annual revenue from $5.6 billion to $11.4 billion." [source]

One analyst "said much of the infrastructure Frontier is acquiring is old... When you acquire a lot of aging infrastructure there is a cost to maintain it." Plus pensions, unions, CAPEX, dividends and interest expense. That is a LOT of cash! "Interest Expense Approximately $1.53 billion (including California, Texas, and Florida acquisition).

"Verizon customers who have questions can visit www.meetfrontier.com for information." That will be one slammed website!

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