Verizon’s divestment continues….

Verizon continues to shed its rural assets. In a deal announced earlier last month, they have decided to divest their assets in 14 states – predominantly in rural markets. This is definitely a part of the strategy that Verizon is carefully executing since last 5-6 years – first with the divestment of Hawaiian assets to Carlyle Group and then they sold off  Maine, Vermont and New Hampshire access lines to FairPoint and now assets in 14 states to Frontier. It is definitely good for Verizon – they are heavily investing on the assets with a growth profile and divesting assets which are not strategic for their business.

Here are some interesting facts about this transaction -

• 4.8 million access lines (13% of total switched lines)
• $4.4 billion in revenue
• Approximately 11,000 employees.
• 43% of their total square miles in their wire line footprint
• 37% of their  total wire centers.

Essentially Verizon is reducing its footprint in non-FIOS areas and improving its operational efficiency by increasing the density. Verizon will maintain its footprint in around 27 million households and aggressively going after 70-80% FIOS penetration. Verizon continues to shift its wireline business more towards growing broadband and video through the rollout of FIOS.

So what this means for Frontier – if these assets does not make sense for Verizon then why it makes sense for Frontier to pay approximately $1800 for each access line? In my opinion, Rural ILECs needs to consolidate and improve their footprint so that they can operate efficiently. Density really matters for any ILEC. As per Frontier’s own estimate, they are expecting to realize a synergy of over $500M with this transaction. This transaction will make Frontier 5th largest ILEC in US with significant rural presence. The new company will have 37 households per sq mile (compare with Verizon around 128) with approximately 70% access lines in the rural areas. From operations perspective, this will generate significant saving for Frontier as they already have operations in 11 out of 14 states being acquired through this transaction. Frontier will grow their foot print in 24 states and  add only 3 new states – Washington, North Carolina and South Carolina – through this transaction.

As we have seen in similar  transactions (Carlyle Group, FairPoint), system separation from Verizon and then integration with their own OSS/BSS will continue to be a major challenge. Frontier has allocated approximately $192 Million as CapEx and OpEx for this initiative. After listening to their Investor call, I feel that Frontier management is fully aware of the challenges and they are applying a very cautious approach to this transaction – Frontier will continue to use Verizon’s services through TSA in 13 states and operate the current billing platform. They are not considering to integrate or migrate these 13 states on their platform by closing. Frontier also does not have any hard date for this migration and they can continue to pay Verizon an inflation adjusted fee as long as they wish to keep these applications. Only West Virginia with 13% of the access lines will need to be converted by the closing. This will definitely give them enough room to plan and execute the system integration activities. Frontier management also touted their previous experience in integrating Rochester Telephone, Commonwealth Telephone and Global Valley Networks in the past. They also pointed out that they have successfully consolidated 5 billing systems into one over past 5 years and migrated 1.7M access lines!

For next year or so, Frontier management will be busy in executing this transaction. The BSS/OSS integration itself will take significant resources. Key to the success will be unflinching focus on execution.