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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Finally there is a winner in the US telecoms wars. Mobile phone operators, broadband and pay TV distributors have struggled in recent years to excite investors with trillions in legacy capital investment not really paying off yet in sustained, high profits. Inorganic growth may be the next, even more expensive, option for the industry titans.
Verizon said on Thursday that it would acquire Frontier Communications, for $20bn in aggregate value, implying a 30 per cent equity premium paid. Frontier is a legacy localised wireline telco that has been investing heavily in moving away from copper pipes to fibre.
Verizon’s core mobile phone business has stagnated and it is part of a sector push to converge phone, internet and television into a single package for consumers. Verizon has about 7mn current fibre subscribers, concentrated in the US Northeast, and will add another 2mn from Frontier whose operations are scattered across the US.
A few titans — Verizon, AT&T, T Mobile, Charter, Comcast — should ultimately rise as the only survivors. That process leaves the current mid-tier like Frontier as acquisition targets.
Frontier went bankrupt in 2020, in part because of Verizon. Frontier had acquired a regional telco business from Verizon almost a decade ago, with the resulting debt taken on becoming unsustainable. In the Chapter 11 process, it transferred equity control to its then bondholders, slashed $10bn of its $18bn total debt load, and re-emerged at an enterprise value of just $11bn. Frontier’s two largest shareholders today are the Wall Street sharks, Ares Management and Cerberus.
In the Verizon transaction, Frontier’s equity will be valued at about $10bn while $11bn of Frontier current debt is to be repaid at par in a refinancing, a huge win for the target’s creditors.
Another Frontier rival, Windstream, also filed for bankruptcy in 2020 and subsequently reorganised. Lumen, a third regional telco, just completed a $20bn debt restructuring outside of court but its market cap is just $5bn; it may eventually succumb to bankruptcy too. Still, suddenly those two could become targets in the fibre sweepstakes.
Verizon shares are off about a third from where they traded pre-pandemic, though there are far bigger blow-ups among big telcos. The hope is that over time, ultrafast internet and clear mobile phone connections will demand pricing power with customers and that the continuous heavy capital investments of previous years is no longer necessary. Telco investors, who have heard it before, have every reason to remain wary of this expensive deal.
