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Verizon Sells Most of Its Remaining Rural Footprint to Frontier
Comment by Matt Davis
On May 13, Verizon disclosed that it has reached an agreement with Frontier Communications to sell 4.8 million access lines, representing approximately 13% of Verizon's total. The divestiture follows a similar deal struck with Fairpoint Communications in 2007 for 1.8 million lines. The $8.6 billion transaction represents a valuation of approximately $1800 per line, roughly the same amount they were paid for access lines in the Fairpoint divestiture.
IDC expected this divestiture to have happened more than a year ago. By waiting, Verizon obviously found the right buyer at the right time. Frontier is likely to be a sizable recipient of the American Recovery and Reinvestment Act (ARRA) stimulus spending on rural broadband initiatives, and this deal gives the company the prospect of cheap capital from government backed loans or even outright grants. This acquisition will give Frontier more territory to tap that pool of capital. Due to unclear language regarding Net Neutrality considerations and a lack of interest in developing its rural territories, Verizon was unlikely to aggressively pursue that funding. (Note: Before the deal closes, any ARRA funding pursuits would have to be initiated by "SpinCo," the temporary subsidiary.)
This continues and possibly concludes a strategy Verizon has pursued in order to exit the rural-focused voice and broadband service provider business. The territory being sold represents 43% of Verizon's geographical footprint in terms of square miles and reduces its overall households passed footprint from just under 32 million to approximately 27 million homes. The territory is classified as 70% rural and only 1% urban. Verizon indicated that it is unlikely to divest any more territory.
Despite the fact that Verizon continues to provide guidance that it will top out its FiOS build at 65% to 80% of its addressable market, the company has no current plans to sell off the remaining non-FIOS territory, which it believes fits in with its overall suburban/urban residential strategy. Due to the Frontier deal, Verizon has readjusted its FiOS addressable market target to 17 million from 18 million households. IDC anticipates that we will see more activity in DirecTV bundling and DSL upgrades in this territory. There is a potential that Verizon may finally turn to a VDSL2/FTTN strategy in these territories.
Frontier will be under enormous pressure to efficiently operationalize an acquisition of this magnitude. The new territory expands Frontier from 2.25 million access lines to 7.05 million. Despite tripling the size of the operational area, Frontier has only increased its presence in three additional states — Washington, and the two Carolinas; however, the move will dramatically expand the company's footprint in Indiana and Ohio, with an increase in their access line count from 5,000 to 1.35 million lines — so there is a lot of work to do in those states. That said, Frontier has experience in making these acquisitions work on a smaller scale integrating acquisitions of Commonwealth Telephone and Global Valley Networks. In total, the company has successfully integrated 1.7 million lines over the past five years.
Similar to the Fairpoint properties, DSL broadband is currently available in approximately 60% of the footprint, 30% lower than the Frontier average despite having almost identical market demographics. Verizon's lack of attention spent in these territories hands Frontier the task to build new facilities and also the opportunity to penetrate unserved or underserved markets. Frontier expects its CAPEX budget to expand from $290 million to $700 million, which spells opportunity for current Frontier technology vendors that did not have relationships with Verizon.
The deal is another example of the continuing consolidation in the RLEC arena; smaller telcos understand that scale is extremely important as margins for traditional subscription services decline. IDC expects this trend to continue due to normal market development and perhaps accelerate in the next 12 months due to the impact of the ARRA.
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