NEW YORK (Reuters) - Verizon Communications Inc will sell 4.8 million rural phone lines to Frontier Communications Inc for $5.25 billion in stock, getting rid of a declining business to focus on wireless and broadband services.
The deal will triple the size of Frontier, making it the largest rural-only service provider in the United States. Frontier, whose shares fell slightly, said the deal will boost earnings and provide $500 million of annual savings.
On the closing of the deal, Frontier will take on $3.3 billion of Verizon debt and Verizon shareholders will receive Frontier stock giving them up to a 71 percent stake in Frontier.
It comes amid a wave of consolidation in the rural phone market, as providers seek to cut costs as more consumers cancel landlines. Last year, CenturyTel Inc announced a deal to buy Embarq Corp for $5.8 billion of stock.
Frontier Chief Executive Maggie Wilderotter told Reuters she would expand high-speed Internet services, now only in 60 percent of the lines being bought.
“These markets have a lot of upside opportunity from a revenue perspective,” Wilderotter said in an interview. “One of the things we’re going to be very focused on is bringing broadband to rural America in these 14 states.”
Frontier said it needs to cut its per-share dividend to 75 cents a year, from $1, after the deal. On the plus side, the deal reduces its debt-to-equity ratio to 2.6 from 3.8.
This is the latest of several deals where Verizon has shed traditional home phone lines in markets it views as less strategic to focus on more-lucrative wireless customers and nascent video services that compete with cable companies.
“Shareholders see this transaction boosting Verizon’s growth rate because it lowers the exposure to declining legacy phone assets while increasing exposure to wireless, video and the enterprise segment,” said UBS analyst John Hodulik.
One person familiar with the situation said that Verizon was unlikely to sell any more rural lines after the Frontier deal as it has already sold Hawaii and New England assets.
Verizon said the deal would dilute Verizon’s earnings by less then 5 percent in the first year after the deal closed, expected around the middle of 2010 after regulatory approval.
But Verizon CEO Ivan Seidenberg told analysts in a conference call that the deal would cut Verizon’s revenue from the wired home phone business to 15 percent from 18 percent, letting it focus on growth areas, mobile, video and Internet.
“We’ve feeling very comfortable we have a way clear to generate the kind of growth we’re looking for,” he said.
Frontier’s Wilderotter said the deal includes markets in four states where Verizon sells its FiOS video service.
She said Frontier, which provides video services in a partnership with DISH Network Corp in its current markets, would see how FiOS works before deciding if it would build its own video service in other markets.
“We believe the penetration of a triple play for voice video and data will be a huge upside as well,” she said.
Frontier said the deal would add to free cash flow in the second full year of operation, increasing free cash flow in a double-digit percentage range in the third year and beyond.
Stifel Nicolaus analyst Chris King sees the deal as a good move for Frontier, but noted, “They’ll have to get past the initial reaction that anyone who buys assets from Verizon is a fool.”
Frontier shares closed down 3.7 percent, at $7.29, on New York Stock Exchange, while Verizon shares ended down 2.1 percent, at $29.75, also on the NYSE.
King cited the recent bankruptcy filings of Idearc, Verizon’s spinoff of its phone book business, and Hawaiian Telecom, which it sold to private equity investors. He also noted that Fairpoint Communications Inc, another buyer of Verizon assets, was trading at little over a dollar.
But he said the deleveraging and the savings promised by the latest deal made it attractive to Frontier shareholders.
With more than 7 million access lines in 27 states, Frontier says it would become the largest pure-play U.S. rural provider of voice, broadband and video services. Other rural providers include Windstream Corp.
Frontier said that it would have had 2008 revenue of $6.5 billion and earnings of $3.1 billion before interest, taxes, depreciation and amortization with the combined assets.
To make the deal tax-free for its shareholders Verizon is creating a separate entity for the assets being sold, which will be spun off to Verizon investors and then merged with Frontier.
Verizon shareholders will own between 66 percent and 71 percent of the entity at the deal close, while Frontier shareholders will own 29 percent to 34 percent.
The per-share price will be collared between $7 and $8.50 and Verizon shareholders will get a share of Frontier stock for roughly 4.2 shares of Verizon stock held. The deal involves Verizon’s wireline business in 14 states, from which 11,000 Verizon employees will move to Frontier.
The companies said they expect state and federal regulators to approve the deal in about a year. But unions representing 8,100 affected workers said they had “serious concerns” about the deal, which they said they would bring to the companies.
Citigroup Inc and Evercore Partners acted as financial advisers to Frontier. Barclays Cap and JPMorgan Securities advised Verizon. Cravath, Swaine & Moore LLP acted as legal adviser to Frontier.
(Reporting by Anupreeta Das, Sinead Carew and Jessica Hall;
Editing by John Wallace, Dave Zimmerman)
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