By Sinead Carew
Dec 17 AT&T Inc, the biggest U.S. phone
company, said on Tuesday that it would sell its wireline
operations in Connecticut to regional telephone operator
Frontier Communications for $2 billion in cash, to help
fund network upgrades.
Frontier shares rose more than 8 percent after it said the
deal would boost its dividend payout ratio, generate savings and
improve its adjusted free cash flow.
Since many people are disconnecting home phones in favor of
wireless services, regional operators such as Frontier have had
to look to acquisitions for growth. AT&T, which depends on
wireless for growth, and has said it would look to sell
non-strategic wireline assets.
Citi analyst Michael Rollins said the addition of AT&T
customers would help boost Frontier's valuation.
"With broadband penetration above Frontier's average
already, we view the transaction as largely a financial
opportunity for Frontier to present better near-term free cash
flow metrics," said Rollins, who said its shares could rise as
high as $5.15 as a result of the deal.
Frontier shares were trading at $4.77, up 36 cents in
midafternoon trade on Nasdaq.
Credit Suisse analyst Joseph Mastrogiovanni said the price
implies an enterprise valuation of 4.8 times earnings before
interest, tax, depreciation and amortization for the phone lines
and compares with a multiple of approximately 4.5 times for
assets Verizon Communications sold to Frontier in 2009.
Atlantic Equities analyst Chris Watts said it made sense for
AT&T to exit its Connecticut wireline business as it is the only
state in the U.S. Northeast where it operates traditional phone
service. Its main operations are in the South and Midwest.
AT&T cited the deal as a source of funding for ongoing
upgrades of its wireless and wireline networks. But along with
its sale on Dec. 16 of wireless towers to Crown Castle
for $4.83 billion, the Frontier deal could also help support
global ambitions as AT&T is considering expanding into Europe.
"Two billion dollars in additional cash financing wouldn't
harm that at all." said Watts.
But on its own, the deal does not move the needle much
financially for AT&T, which said the Connecticut operations
bring in $1.2 billion in annual revenue, or less than 1 percent
of its expected 2013 revenue.
AT&T said the deal will not affect its 2013 results and that
it does not expect significant changes to its project VIP
network upgrade, which involves a wireless upgrade with faster
data speeds and an expansion of its U-verse service.
AT&T said it still plans to keep serving wireless consumer
and business clients in Connecticut and will continue with its
planned wireline network upgrades in its remaining 21 states.
FINANCIAL BOOST FOR FRONTIER
Under their agreement, Stamford, Connecticut-based Frontier
will buy more than 900,000 phone lines, about 415,000 broadband
connections, and about 180,000 of AT&T's U-verse video
The deal, expected to close in the second half of 2014, is
subject to review by federal and state regulators.
Frontier, which operates in rural areas and smaller towns in
27 U.S. states, said it expected the deal to improve its
adjusted free cash flow per share in the first year after
closing and help it achieve annual savings of $200 million after
It also promised a 5 percent increase in its dividend
pay-out ratio for the first year after the deal close.
About 2,700 AT&T employees, most of whom are part of the
Communications Workers of America union, will join Frontier
after the deal closes and Frontier has agreed to honor their
existing labor contract, according to the companies.
AT&T shares were down 30 cents at $33.85 on the New York