Verizon's Frontier, American Tower Deals Seen Aiding Telco's Wireless Focus

Verizon’s wireline deal with Frontier aligns with Verizon’s “commitment to extend our industry leadership position in the markets we serve by being very strategically focused” on its wireless business, which it solidified last year when it bought Vodafone’s minority stake in Verizon Wireless, said Verizon CEO Lowell McAdam during an investor conference call Thursday. He cited Verizon’s $10.4 billion spectrum purchase in last month’s AWS-3 auction as a “best use of proceeds.” The auction netted Verizon 181 licenses that cover territory with 192 million people (see 1501300051).

McAdam also noted the influence of the FCC upcoming vote on new net neutrality rules and its expected reclassification of broadband as a Communications Act Title II service, which he said was causing “regulatory uncertainty” and had “potential impacts on future investments.” Frontier CEO Maggie Wilderotter said during a separate conference call that she’s comfortable with potential Title II reclassification because the company already operates under Title II-level regulation in many areas it serves.

Verizon’s wireline networks in the three states are “well maintained and upgraded networks, and 54 percent of these networks are the best networks in the country, so these are not fixer-uppers,” Wilderotter said. Verizon previously sold Frontier wireline assets in 14 states in 2010, but in that case “we wound up in two years of integration and conversion” of inadequate infrastructure, she said. Frontier bought AT&T’s wireline assets in Connecticut in October (see 1410240059). California, Florida and Texas are "among our strongest financial performers” on the wireline side, but they’re difficult to continue integrating into Verizon’s contiguous East Coast network, McAdam said.

Verizon’s wireline sale and American Tower deal “will drive the next stage of Verizon's evolution from diversified carrier to wireless-focused provider,” UBS analyst John Hodulik wrote investors. About 73 percent of Verizon’s revenue will come from its wireless business after the deals close, he said. The deals are “a very good thing,” particularly given its purchases in the AWS-3 auction, said Wells Fargo's Jennifer Fritzsche. “Will they need more spectrum? Yes we think so … but given these moves with its capital structure we do not sense they will be buying such an asset with their backs up against the wall.”

Citi is “surprised that Verizon is not taking a more aggressive stance to reinvest in wireless spectrum and/or video assets to further its strategic ambitions to remain a leader in mobile broadband and emerge as a scale player in mobile-first video,” but believes the telco was right to divest additional “non-core” wireline assets and towers, said analyst Michael Rollins. Further focus on Verizon’s wireless business presents risks for the telco, particularly since “growth in the wireless business is becoming more difficult to generate, and over the longer-term we believe mobile platform operators could emerge as competitors,” said Evercore's Jonathan Schildkraut. Wireless data growth may also begin to slow “as smartphone penetration levels off,” he said.

Analysts were divided on whether Verizon’s deal with American Tower would benefit the tower company. New Street Research was “cautious on the terms of the deal” before the companies confirmed, and the full details of the deal appear “modestly worse than we initially expected,” said analyst Spencer Kurn. The deal gives American Tower leasing and operation rights for Verizon’s towers for 28 years and gives it the option to buy the towers at the end of that period. The deal is positive for American Tower because it “adds to the company's already strong scale and allows it to nab the last big US carrier deal to be had,” Fritzsche said.