Verizon-Frontier Acquisition: Partners, Analysts Mixed on Reaction

Verizon's acquisition of Frontier and Frontier's fiber business could help Verizon earn back momentum in wireline, but partners and analysts are waiting to see how the deal plays out.

Verizon announced Thursday morning that it was buying Frontier Communications in an all-cash transaction worth $20 billion. The boards of directors at both companies have approved the deal, but it awaits a thumbs-up from Frontier shareholders and a regulatory process that Verizon estimated at 18 months.

Verizon's Hans Vestberg

It's another chapter in a history of deals between the two. Verizon in 2009 sold about 4.8 million access lines to Frontier for stock valued at $8.6 billion. Frontier said at the time that the transaction made it the largest rural service provider in the U.S. and the fifth largest incumbent local exchange provider (ILEC).

Now Verizon is getting those assets and more back for the price of $20 billion.

"The gist of it is that Verizon is buying back networks and operations it sold to Frontier many years ago. Verizon is getting Frontier and all its other acquired properties in the bargain," said Brian Washburn, research director of service provider enterprise and wholesale, Omdia, an Informa company. "Frontier’s past bankruptcy notwithstanding, it has invested to modernize its networks, and Frontier made modest progress over the years growing its fiber subscriber numbers."

Related:Verizon Announces $20 Billion Frontier Acquisition

Omdia's Brian Washburn

The companies said they estimate they will find $500 million in annual run-rate cost synergies.

"The first are the obvious economies of scale across operations, processes and systems. Verizon is re-inheriting some properties: Those should be familiar and easier to re-integrate into the business, reducing costs. There’s also a chance to reduce cost of content licensing, e.g., for TV services," Washburn said.

Adding Frontier Fiber

Comments from Verizon CEO Hans Vestberg have highlighted Frontier's investments in residential and business fiber passings. Frontier currently sits at 7.2 million fiber locations and plans to make that number 10 million by the end of 2026.

In the meantime, the acquisition brings in about 2.2 million Frontier fiber subscribers in 25 states. Verizon reports about 7.4 million connections for its Fios fiber offering.

"With Frontier's fiber added to our portfolio, we will be the only carrier that will have size and scale in both fiber and fixed wireless access," Vestberg told investors Thursday.

Verizon has been working on building out its wireless network in the meantime and drawing business wireless clients, said Meggan Fenton, senior director of supplier management at technology services distributor Telarus.

Related:T-Mobile, Verizon Eye Split US Cellular Acquisition

"Frontier has been diligently working on expanding their fiber accessibility, updating and shifting from copper to fiber-dominate infrastructure. Both have a keen ability to improve accessibility and activation in various markets, including rural and expansion markets," Fenton told Channel Futures. "This acquisition demonstrates the continued need for transformation and convergence of network connectivity options to meet consumers' needs both geographically and technologically.

Light Reading called the deal a reflection of Verizon's desire for "convergence" of wireless and wireline portfolios. TD Cowen analyst Gregory Williams noted that rival ILEC and mobile operator AT&T mentioned the word convergence 18 times in its latest earnings call.

And Williams gave a wary assessment of the strategy.

"We are not sold on convergence. It often only works when you pick a side. That is, [cable companies are] giving away wireless with $30 [per] line plans and taking far inferior margins in order to protect [their] coveted wireline business," Investor's Business Daily quotes Williams as saying. "Convergence could be destructive for the entire industry as players fight across the wireline-wireless landscape."

Washburn said Verizon could benefit from leveraging wireless and wireline together.

"To the extent that Verizon can cross-market or substitute wireline services with wireless voice and FWA broadband, it can work wireline and wireless separately and together as the default local service provider," Washburn told Channel Futures.

Washburn added that Verizon may be able to offer Frontier customers deeper managed services and product features.

"It can add collaboration, security and pre-built industry solutions for the small business up to the large enterprise," he said.

Mixed Partner Reactions

Graeme Scott, vice president of advanced network and mobility at Telarus, gave a thumbs-up to the deal.

"We love anything that benefits our technology advisors, and Verizon is a stable partner that has a long-term commitment to the channel and Telarus," Scott said.

Vestberg preached the value of scale in conversations with investors. Mejeticks CEO Rob DeVita, whose company partners with Verizon and Frontier, warned that size does not always bring a benefit.

"My hope is that the government intercedes and stops this. We don't need any of the LECs getting any bigger," DeVita told Channel Futures.

The rumor swirled earlier this year that T-Mobile and Verizon were considering buying separate parts of US Cellular in order to avoid regulatory intervention.

Jeff Pratt is vice president of strategic alliances at ClearConnect, a partner of Verizon and Frontier. He said his firm is looking to give clients the "best possible connectivity solutions."

"The recent news of Verizon's acquisition of Frontier Communications is a positive development. Frontier's robust fiber-optic network will enhance Verizon's product portfolio and expand fiber availability," Pratt told Channel Futures. "We're committed to working closely with both providers throughout the transition to ensure a seamless experience for our customers and continue delivering exceptional value."