AT&T-Frontier Deal: A Sign of Things to Come?

AT&T's sale of its Connecticut wireline network to Frontier Communications may be a foreshadowing of things to come -- for both companies. (See Frontier Buys AT&T Connecticut Network for $2B.)

The $2 billion sale allows AT&T Inc. (NYSE: T) to exit from a wireline footprint that is not strategic to its long-term business, while generating cash for Project Velocity IP, the all-IP, wireless, cloud-based network of its future. Frontier Communications Corp. (NYSE: FTR), which already bit off part of Verizon Communications Inc. (NYSE: VZ)'s wireline footprint, expands into its 28th state.

Both AT&T and Verizon have made it clear in recent years that their traditional wireline networks are becoming less essential to their long-term business plans, especially where those networks are more copper-based and don't include major markets.

AT&T had built a statewide fiber network in Connecticut, and its U-verse IPTV network reached 180,000 paying customers, in addition to the 900,000 voice connections and 415,000 broadband connections. The quality of that wireline footprint no doubt made the deal more attractive to Frontier, which has experience in managing the often-tricky process of taking over a telco operation from an incumbent provider. (See The Brave Old Frontier and A Brave New Frontier – in an RV.)

Frontier paid $8.6 billion to take over Verizon wireline assets in 14 states that include a small FiOS fiber-to-the-home footprint but mostly copper facilities.

It would not be surprising to see Frontier or other Tier 2 US local exchange carriers such as Windstream Communications Inc. (Nasdaq: WIN) acquire the remaining AT&T or Verizon landline properties that are non-strategic. Verizon recently made it clear that it has finished its FiOS build-out, meaning any remaining LEC footprint will be DSL only, and those customers are likely to be picked off by competitors or -- in the longer run -- find LTE broadband an attractive alternative. (See FiOS Expansion Is Finito.)

On the other hand, any company buying AT&T or Verizon landline facilities is likely to then face competition from those companies as they turn to selling LTE as a broadband alternative, which will make this particular merger space interesting in the years ahead.

Where AT&T and Verizon aren't able to divest their wireline assets, they are working hard at the Federal and State level to get long-standing voice network regulations lifted, and could even choose to walk away from some network obligations if they don't get relief in rural areas where they no longer want to be the carrier of last resort.

— Carol Wilson, Editor-at-Large, Light Reading

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mendyk 12/17/2013 | 4:28:59 PM
Re: SNET? Well, actually, the guy who figured all this out years ago is one of the world's most famous capitalists -- Warren Buffett.
Carol Wilson 12/17/2013 | 4:19:33 PM
Re: SNET? Hey there, none of your socialist rabble-rousing. 
mendyk 12/17/2013 | 4:18:16 PM
Re: SNET? "Pressure from Wall Street" usually has a corresponding internal pressure from executives whose compensation rides on share-price performance. It's a good thing there are rules to prevent share-price manipulation. Wink wink nudge nudge.
Carol Wilson 12/17/2013 | 4:10:02 PM
Re: SNET? Ah yes, the long-distance and wireless assets - good call, Duh, I had forgotten that piece of it. 

And I agree with Mendyk as well - AT&T is almost certainly looking for higher margins than Frontier will expect. I think AT&T is also under a different kind of pressure from Wall Street. 
Duh! 12/17/2013 | 4:07:00 PM
Re: SNET? Took a moment to look up the history.

AT&T sold their 22% stake in SNET in 1984. 

SBC acquired SNET in 1988 for $4.4B.  That included significant long distance and some wireless assets, which I assume will stay with AT&T after the sale.  The purported reason for the acquisition was the long distance assets;  SBC had just shaken the Consent Decree's prohibition on long distance services.

AT&T sold the former SNET wireline properties to Frontier for $2B. 

One would need to go through SNET's 1998 financials to tease out the 1998 valuation of their wireline properties. 

Mendyk's margin hypothesis makes a lot of sense. 
mendyk 12/17/2013 | 3:02:24 PM
Re: SNET This may be less an issue of lower opex than lower (read more realistic) expectations for business performance. The Tier 1s are convincing themselves that they can't afford to keep lower-margin products. Frontier thinks otherwise. And as at least one previous poster has pointed out, the margin decks may be stacked in favor of wireless right now at the Tier 1s. The obsession with margins seems to be a strong trend now across the business landscape in general, even though margin erosion is almost a certainty as products mature.
Carol Wilson 12/17/2013 | 3:00:50 PM
Re: Whose idea? Interesting thought, Dan, that Frontier might have driven this deal. I don't believe AT&T and Verizon would sell any assets - Verizon isn't likely to sell its landline networks where there is a heavy percentage of FiOS deployment. There were only pockets of FiOS in what they sold Frontier. 
Carol Wilson 12/17/2013 | 2:52:16 PM
Re: SNET Wow, after all this time, it's still a challenge to blend different methods of operating? I remember writing about SBC's acquisition of SNET and it seems like centuries ago. 
DOShea 12/17/2013 | 2:27:33 PM
Whose idea? This seems like a property Frontier would naturally be interested in, and I wonder how much they drove this deal to happen, and if AT&T was really actively looking to sell or not. Could the big telcos be at the stage where they will let any landline properties go if they meet a motivated enough buyer?
Aloysious 12/17/2013 | 2:22:39 PM
Re: SNET I find it rather hilarious that AT&T and Verizon want to dump off the areas that it doesn't find profitable all the while receiving state/federal dollars for years to service those areas.

Oh, and they are the only companies in those area for a reason....they made it that way with some of their absurd franchise agreements.

Now, they are dumping them off with laughable VoiceLink-like services?

Not a chance. Glad to see New York fight off Verizon's attempts to make a few more bucks....all the while still receiving top dollars from the cities/states in tax breaks.
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