Verizon plans big fiber bet with $20 billion Frontier deal. Does it make sense?

By Emily Bary

Verizon says the deal will expand its fiber footprint, but analysts expect big gaps in the fiber coverage network even after the acquisition closes

Verizon Communications Inc. said Thursday that it plans to buy Frontier Communications Parent Inc. in a $20 billion all-cash deal that will give it access to the "largest pure-play fiber internet provider in the U.S."

The telecommunications giant expects the acquisition "will significantly expand Verizon's fiber footprint across the nation, accelerating the company's delivery of premium mobility and broadband services to current and new customers," according to a release.

Analysts say Verizon's (VZ) planned deal for Frontier (FYBR) boils down to the theme of "convergence," which captures how telecommunications companies increasingly are bringing together fixed and mobile connectivity, according to LightShed Partners' Walter Piecyk. Companies are looking to sell customers more of their services, but that relies on those services being available in more places.

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Piecyk weighed in on the deal late Wednesday after the Wall Street Journal reported that it was likely. Piecyk said in his report that "it's worth noting that even after this expansion, Verizon would still lack a fiber-based home broadband solution in over 80% of the United States, and would continue to trail AT&T's fiber footprint."

MoffettNathanson analyst Craig Moffett was more negative on the deal. He called it "a bold step in the direction of convergence... which is, in our view, an absolutely atrocious idea," while hitting on the idea of the ultimate fiber footprint as well.

"Verizon's current fiber footprint covers but a small fraction of the U.S., and Frontier wouldn't materially change that," he wrote. "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."

Both analysts noted that the deal is small for Verizon on a relative basis, with Piecyk commenting that it amounts to about a year's worth of capital expenditures and Moffett estimating that it would "re-lever Verizon's balance sheet."

Verizon Chief Executive Hans Vestberg said in Thursday's release that the 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."

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The company anticipates that the deal will be accretive to revenue and adjusted earnings before interest, taxes, depreciation and amortization at the time it closes. Verizon also sees opportunity for $500 million or more in cost synergies by the third year.

The deal is expected to close within 18 months.

The Wall Street Journal reported on the likely deal late Wednesday, and Verizon shares ended that session 3.4% lower, while Frontier shares finished Wednesday trading up 38%. Verizon shares are up fractionally in Thursday's premarket action, whereas Frontier's stock is down 9% premarket and indicating at $35.20.

Verizon plans to acquire Frontier for $38.50 a share in cash.

Piecyk noted that with this deal, Verizon is likely putting aside speculation that it would do a much larger acquisition of Charter Communications Inc. (CHTR), which finished Wednesday with a market capitalization of about $47 billion.

He's long thought a Charter deal would make sense. "Charter, with its 58 million locations passed, represents a transformative opportunity compared to Frontier's 15 million, only half of which are fiber-ready," Piecyk wrote. "Moreover, Charter's substantial free cash flow would likely be far more appealing to Verizon's dividend-focused shareholders."

Read: Why Charter's stock had its best day on record after its earnings report

-Emily Bary

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09-05-24 0655ET

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