It could take 18 months for Verizon to close its proposed $20 billion acquisition of Frontier Communications. But the deal, which aims to give Verizon's convergence strategy a boost, might be in for a bumpy ride before it's consummated, says a top industry analyst.
Bottom line: The process is not yet over, and there's a possibility that the price could go up.
"We think shareholders should demand more. We think NON-activists shouldn't sell yet … Frontier shareholders could secure a higher price with or without a competing bid," Jonathan Chaplin, analyst at New Street Research, suggested in a research note (login required).
He argues that Verizon's offer of $38.50 per share for Frontier undervalues the company: "We think fair value begins at $62 per share, and it could be higher based on recent transaction comps."
Frontier shares were up 51 cents (+1.45%) to $36.10 each in Friday morning trading.
Frontier believes it's a good deal for shareholders. "I am confident that this delivers a significant and certain cash premium to Frontier's shareholders, while creating exciting new opportunities for our employees and expanding access to reliable connectivity for more Americans," Frontier President and CEO said in a statement when the deal was announced on September 5.
Deals without competing bids
Chaplin outlined a set of recent deals in the telecom world in which shareholders were successful in driving up the price an average of 18% without a competing bid. Deutsche Telekom's acquisition of MetroPCS, which forced DT to pay 27% more for its equity in MetroPCS than originally planned, represents the "best comp" in that category.
By comparison, New Street's review of several telecom deals showed that bids increased by 22% on average during an auction process. And while the odds of getting fair value rises with a competing bid, Chaplin likewise believes that Frontier shareholders can achieve it without a new round of bidding.
Examples of other deals that went to auction or faced shareholder opposition included in New Street's analysis included Straight Path, Clearwire, Consolidated Communications as well as bids by Cablevision Systems (now part of Altice USA) and Cox Communications' bid to take their respective companies private, among several others. Among them, Consolidated's board got a higher price from BCI/Searchlight following opposition from shareholders.
Auction odds are low
Chaplin feels the odds are relatively low that Frontier will receive a competing bid.
Frontier, he explained, ran a bidding process (with Verizon signing its non-disclosure agreement in December 2023). More detail about how that process went will be revealed when the proxy statement is filed, he added.
Other industry watchers believe Verizon is making the wrong move.
The proposed acquisition is "a poor allocation of capital," according to KeyBanc Capital Markets. MoffettNathanson analyst Craig Moffett considers the deal "a terrible idea," believing it won't provide Verizon with enough fiber footprint to fulfill a convergence strategy.
The Verizon-Frontier deal has also sparked speculation that it could spark additional fiber-focused acquisitions, with Lumen considered a likely target.
Update: Breezline could be another potential M&A target. Patrice Ouimet, CFO of Cogeco (Breezeline's Canada-based parent company), said parts of Breezeline could come on the block.
"We are looking at our network, especially in the U.S., right now because we are in some different places. And if we feel some areas could be good disposal candidates, we'll look at it," Ouimet said Tuesday (September 10) at the BMO Capital Markets conference, as reported by PolicyBand's Ted Hearn.
Hearn points out that Cogeco has expressed concerns about Breezeline's performance against fixed wireless access (FWA) competition in Ohio. Breezeline (then known as Atlantic Broadband) acquired WideOpenWest's Columbus and Cleveland, Ohio, systems in September 2021.
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