There is little denying that AT&T Inc. (NYSE:T) is a monster-sized company, and will be for some time. However, yesterday saw the announcement that the telecommunication giant will be getting a bit smaller in order to build a bigger 4G LTE network. Frontier Communications Corp (NASDAQ:FTR) and AT&T Inc. (NYSE:T) both announced yesterday that the former will be purchasing approximately 415,000 data, 900,000 voice and 180,000 video residential connections of AT&T in Connecticut.
Frontier Communications to pay cash for assets
It’s believed that Frontier will pay $2 billion in cash for these assets that represent annual revenue of $1.2 billion. While this accounts for less than 1% of AT&T Inc. (NYSE:T)’s annual revenue, Frontier Communications Corp (NASDAQ:FTR) for its part will be able to raise its dividend by over 5% in the first year with the deal that will also be accretive to its cash flow. Frontier Communications Corp (NASDAQ:FTR), which is already based in Connecticut, is also hoping to enjoy $200 million in cost synergies by pairing the purchase with its existing network and Connecticut operations.
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“We are excited to be acquiring AT&T Inc. (NYSE:T)’s wireline operating company in Connecticut, where our company has been headquartered since 1946. This is a great opportunity to bring to Connecticut Frontier Communications Corp (NASDAQ:FTR)’s portfolio of products and services, such as Frontier Secure, our industry-leading digital security offering that gives customers top-rated online computer protection and premium technical support,” Maggie Wilderotter, Frontier Communications Corp (NASDAQ:FTR) chairman and CEO, said in a statement yesterday morning. ”We see an opportunity to enhance broadband capabilities in Connecticut.”
Added Dan McCarthy, Frontier Communications Corp (NASDAQ:FTR) president and COO, “AT&T’s Connecticut business is substantial, well-defined and covers nearly the entire state. Based upon our track record, we are extremely confident that we will leverage this opportunity to deliver an excellent customer experience and shareholder value.”
Deal must pass regulatory hurdles
The deal is subject to review from a number of agencies on both a state and federal level. These include the U.S. Department of Justice, and the Federal Communications Commission on the federal level. With JPMorgan Chase & Co. (NYSE:JPM) providing the financing for Frontier, the deal’s approval is expected sometime in the second half of next year with the completion of the deal expected in the third-to-fourth quarter.
In a statement, Patricia Jacobs, president of AT&T Inc. (NYSE:T) New England added that from a customer standpoint it will also be business as normal until the deal closes, and that customers can expect the same service as always.
Michael Rollins, an analyst for Citi, released a note yesterday that called the move a “surprise given Frontier’s historical preference to reduce financial leverage over time.” While he agrees that the deal will help Frontier Communications Corp (NASDAQ:FTR) with its cash flow and dividend growth, he did not change his Sell rating on Frontier Communications Corp (NASDAQ:FTR), writing that “the improvement in [free cash flow] metrics is coming at greater risk to the equity holder vis-à-vis increased financial leverage.”