Frontier sparks 'formal and comprehensive review process'

Frontier Communications kicked off the week by revealing it has begun a "formal and comprehensive review process," and that it has appointed an M&A banker to its board of directors.

Frontier did not outline a potential timeline for the review, but said the process will explore several options, including "continued optimization of our operational and financial strategy," strategic partnerships, joint ventures, divestitures, mergers and other types of "business combinations."

Update: Multiple analysts pointed out that Frontier's announcement is to point out that it's executing on actions that were already ongoing. "We suspect today’s announcement is really formalizing inquiries that were mostly underway, and possibly accelerating some," New Street Research analyst Jonathan Chaplin wrote in a note issued in the wake of Frontier's announcement.

Frontier said it's conducting the review to unlock value for shareholders. But the announcement comes a couple months after activist investor Jana Partners applied pressure on Frontier to explore its options, including a possible sale of the company.

At the time, Frontier Executive Chairman John Stratton said the company is "very willing to explore all alternatives ... Everything's on the table."

Jana cheered Monday's announcement. "We support the Company's focus and review of all opportunities to unlock shareholder value – and are confident in the Board and management team's ability to do so," it said in a statement.

Related:Frontier 'very willing to explore all alternatives' amid investor pressure

But today's announcement did not give Frontier shares an immediate shot in the arm – they were down 38 cents (-1.58%) to $23.73 each in Monday morning trading.

Update: Frontier shares closed Monday up 3 cents (+0.03%) to $24.14 each.

Frontier also appointed Woody Young to its board, expanding it to ten members (including eight independent members). Young is the former chairman of mergers and acquisitions at Perella Weinberg Partners, and a former co-head of global telecommunications, media and technology at Lazard. Young advised on some major deals, including AT&T's acquisition of Time Warner and Sprint's merger with Nextel.

Frontier's review comes nearly three years after the company emerged from bankruptcy, installed new leadership and embarked on a turnaround plan centered on building fiber to 10 million locations by 2025. Frontier ended the third quarter of 2023 with 6.2 million fiber locations and 1.79 million fiber subscribers. Frontier is scheduled to post Q4 2023 results on February 23.  

To help fund its build, the company offered about $1.05 billion in debt secured by fiber assets (the amount was later upped to $1.6 billion) and customer contracts in the Dallas area, and tapped into about $169 million in vendor financing.

Related:Frontier under more pressure to review its business, possibly sell

Analyst: It's too early to start a sales process

Though Frontier's review mentions several options, some industry watchers believe now is not the right time for the company to conduct a sales process (with AT&T, Verizon and T-Mobile among the potential candidates), believing the more prudent move is to wait until Frontier completes its fiber build and starts to generate more earnings from that initiative.

Plus, "asset multiples for broadband companies are at their lows," and being pressured by fixed wireless access (FWA) gains, New Street's Chaplin explained. He believes that, by 2026, fixed broadband subscribers will be growing at a better rate and boost multiples for Frontier and its peers.

"Running an auction would be a mistake now," Chaplin added, believing Frontier already has the right team in place to execute on its current plan.

"But running a strategic review and adding a strong advisor to the board now makes lots of sense," he added, noting that the company is now in better position to decline offers that would undervalue it.

Related:T-Mobile may be backing a play for Frontier – analysts

Exploring the options

TD Cowen also believes an outright sale of Frontier should not be in the cards... at least for now.

"We believe it still needs to be valued properly as we consider the fiber in the ground and the fiber that has yet to be deployed, more specifically as we consider >$2,500 per fiber home," TD Cowen explained in a research note.

But TD Cowen believes Frontier has several options it could put on the table:

Update: In a separate note, MoffettNathanson analyst Nick Del Deo said the odds of Frontier entering into a JV with a capital partner to support its fiber buildout has risen, and agrees that the odds of an outside sale remain "lower than commonly believed" since Jana Partners got involved.

He also outlined several potential options that Frontier might explore that largely mirror the above. "Today's announcement was intended to make public several actions that were already underway, not to convey a change in strategy," Del Deo added.