Frontier to Pay $2 Billion for AT&T Connecticut Wireline Services
Frontier will acquire AT&T’s wireline residential and business services in Connecticut, said the telcos Tuesday. Frontier will pay $2 billion in cash for the wireline business and statewide fiber network, as well as for AT&T’s U-verse video in the state as well as some satellite-TV customers there. The deal will get a U.S. antitrust, FCC and Connecticut review, said the companies and analysts. State officials said they would examine the proposed deal carefully for harm to consumers.
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"It’s a business that we know very well, and a business that we feel comfortable that we can take, integrate and achieve the cost savings,” said Dan McCarthy, Frontier chief operating officer, in an interview. Frontier plans to go to market “differently” than AT&T did, he said. Connecticut is “not a fixer-upper” but a chance to apply a different cost structure, McCarthy said.
While the landline telecom business faces some ongoing pressures -- having prompted such wireline asset sales in mid-size and small-population states by AT&T and Verizon -- it doesn’t necessarily follow that a targeted transaction like this one won’t offer benefits under the right circumstances, said Medley Global analyst Jeffrey Silva by email. “This deal appears to be such a case in the form of scaled cost synergies through the leveraging of Frontier’s network and operations in Connecticut,” he said. “This looks like a win-win situation. On the surface, there does not appear to be obvious regulatory or antitrust hurdles for US government clearance.” The transaction also gives AT&T cash for further strategic infrastructure development of its 4G LTE wireless, video and enterprise fiber offerings, said analysts including Silva.
Frontier expects to save $200 million annually once integration is complete, it said in a news release. The telco’s dividend payout ratio should also increase by more than 5 percent in the first year, and the all-cash transaction would give Frontier shareholders “the benefit of increased diversification of assets and operations without any dilution in ownership,” the release said.
Frontier will also apply a different “go-to-market strategy” than AT&T, McCarthy told us. “Our way of going to market is to build local engagement. We push decision-making as close as possible to the market.” Larger players such as AT&T or Verizon tend to market similarly across an entire area, he said. In contrast, Frontier plans to segment the state into five areas, and each will have a person responsible for developing its own marketing strategy, he said.
This will give a “small-company feel,” McCarthy said. What’s important to one community -- such as an affordable long-distance plan to Latin America -- can be very different from what’s important to another community -- such as one with a college town where the strategy would be more student-driven, he said. “We think we can apply our way of going to market and make a difference there."
Connecticut Attorney General George Jepsen said the deal could have a “substantial impact on the quality and affordability of wireline telephone, internet broadband and video services” for customers throughout the state. “I will closely examine this deal and fight to ensure that the interests of the state of Connecticut and its residents are fully protected,” said the Democrat in a written statement. Jepsen said he'd focus on evaluating the potential effect on quality of service provided at reasonable rates, as well as the impact on competition, the state’s workforce and state efforts to “streamline and improve the use and control of utility poles.”
Sen. Richard Blumenthal, D-Conn., also plans to ensure the deal doesn’t harm Connecticut consumers, he said in a statement. “I look forward to reviewing what it means for the people of Connecticut, and I will fight to make sure their interests are protected as DOJ and the FCC review this transaction,” said the former Connecticut attorney general.
AT&T indicated the sales proceeds would be used in part to further its Project Velocity IP initiative, said Evercore analysts Jonathan Schildkraut and Marc Albanese in a research note Tuesday. That project involves a $14 billion outlay to expand AT&T’s wireline and wireless broadband network (CD Nov 8/12 p11). Schildkraut and Albanese said AT&T could also use the cash “to help fund spectrum purchases” in front of upcoming auctions and a potential bid for Verizon’s A-block spectrum, and for share buybacks to help drive earnings per share growth.
On a conference call announcing the transaction, Frontier management indicated it has talked with AT&T about expanding U-verse to other markets, and AT&T is “open and amenable to such a development,” Schildkraut and Albanese said. “That said, [Frontier] reiterated its partnership with DISH for video and noted that they had not made plans” to expand IP television within the overall Frontier footprint, or to expand it in Connecticut where U-verse is already deployed, the analysts said.