Verizon has done worse deals than Frontier
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Saba
NEW YORK, Sept 5 (Reuters Breakingviews) -Verizon’s VZ.N purchase of Frontier Communications FYBR.O doesn’t look like a great deal – but at least the U.S. telecoms giant definitely has done worse. Paying $20 billion for the fiber provider, including net debt, leaves CEO Hans Vestberg with his work cut out if he is to make the deal stack up financially. Verizon’s earlier miserable acquisitions of internet brands AOL and Yahoo set the bar low.
The rationale for absorbing Frontier is simple enough. Verizon will grow its fiber broadband network from around 18 million homes to 25 million. Rival AT&T T.N has 28 million households with fiber access, according to New Street Research. Even then, adding fiber to its offerings will leave Verizon covering only 20% of U.S. households according to Morgan Stanley estimates. Competition from T-Mobile US TMUS.O, AT&T and cable firms Comcast CMCSA.O and Charter Communications CHTR.O is fierce, and not very differentiated.
Verizon’s return on investment will be meager though, without some heavy lifting. Frontier ought to make nearly $1 billion of operating profit in the current year, after adding in the $500 million of cost savings Vestberg envisages. Tax that and the return on the $20 billion acquisition is 4%, about half Frontier’s likely cost of capital. Verizon reckons that combining fiber and mobile makes customers less likely to go elsewhere – reducing “churn” by around 50%. Even so, the deal would have to double Frontier’s profit to meet an 8% hurdle.
There are some redeeming features. For one, the $20 billion is relatively small compared with Verizon’s own enterprise value of $323 billion. And the premium on offer, amounting to around $2.6 billion based on the 37% markup to Frontier’s share price on Sept. 3, is covered by the value that will be created by planned cost cuts. Those, at $500 million a year, would be worth a lump sum of around $3.9 billion, if taxed and valued on a multiple of 10.
Frontier is, at least, a business that fits into its new owner’s wheelhouse: Vestberg will be reacquiring assets that Verizon previously sold to Frontier years ago for a total of $19 billion. That’s a big difference from the $9 billion combined purchases of AOL and Yahoo, which Verizon later sold for half that amount. Those transactions happened before Vestberg took over in 2018. He can take comfort that even if his latest deal doesn’t live up to expectations, it can’t be any worse than some of those that came before.
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CONTEXT NEWS
Verizon Communications agreed on Sept. 5 to acquire Frontier Communications for $20 billion including net debt. Frontier investors will receive $38.50 per share in cash. The offer represents a 37% premium to Frontier’s undisturbed price on Sept. 3.
The U.S. telecommunications giant said the acquisition of the largest pure-play internet fiber provider will expand Verizon’s footprint from approximately 18 million homes to 25 million homes.
Graphic: Verizon's shares lag its rivals https://reut.rs/47hIVZv
Editing by John Foley and Sharon Lam
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