Frontier's New Verizon Asset Purchase Might Be Bad For Shareholders

Citi’s Michael Rollins downgraded the rating for Frontier Communications Corp FTR from Neutral to Sell, while reducing the price target from $5 to $4, citing complications associated with the pending acquisition of new assets from Verizon Communications Inc. VZ.

Frontier is preparing to close the acquisition of the three state wireline portfolios from Verizon on March 31. The company expects the acquisition to offer significant synergies, besides entailing an opportunity to stabilize its revenues and OIBDA performance.

While the Verizon portfolio has a greater penetration of the fiber-to-the-home and revenues have been stable to modestly down, Frontier’s revenues from its pre-existing operations [excluding CAF-II benefits] declined by more than 4 percent in 2015, analyst Michael Rollins pointed out.

Complications To The Synergy Effect

Rollins believes that synergy realizations from the asset acquisitions need to be recalculated. He added that Frontier’s recent performance suggests a greater-than-expected drag on its heritage operations.

A study of the previous two acquisitions by Frontier suggests that net synergy realization is much lower than the guided gross energy figures, Rollins pointed out.

“Finally, we do not think the emerging consensus is discounting the guided synergy contributions enough, despite the historical gap,” the Citi report stated.