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

Activist investment firm Jana Partners has taken a stake in fiber company Frontier Communications and is now urging the company to sell, according to Reuters, which adds that "a large communications company" has partnered with Jana Partners on the effort. The financial analysts at Wells Fargo believe that unnamed company is likely T-Mobile.

"T-Mobile is the most logical communications company partner, in our view," the analysts wrote in a note to investors Tuesday. "We note that T-Mobile has an accelerating FCF [free cash flow] story, a solid balance sheet, and has been looking at FTTH [fiber to the home] over the past year via small pilot projects."

The Wells Fargo analysts also noted that other "large communications" companies may be otherwise engaged and not able to back Jana. "AT&T and Verizon are committed to deleveraging over the next couple years, and the cable companies would likely have conflicts with overlapping geographies," they explained.

However, the analysts speculated that DigitalBridge might be another potential Jana backer. DigitalBridge, along with EQT, purchased fiber company Zayo in a transaction that closed in 2020.

The financial analysts at New Street Research cheered the move by Jana, saying it highlights Frontier's financial value.

Related:Is T-Mobile shifting focus from midband 5G to fiber? Or UScellular?

"We are delighted that Jana sees what we see in Frontier – an egregiously undervalued asset that will eventually be folded into a national wireless carrier at twice the multiple and twice the EBITDA [earnings before interest, taxes, depreciation and amortization] that they have today," they wrote in a note to investors.

However, the New Street Analysts argued that now is not a good time for Frontier to sell, in part because the broadband market overall is in a trough and because they believe Frontier could generate higher purchase prices later.

The Jana play

Jana's managing partner Scott Ostfeld confirmed to Reuters that the investment firm now owns a position in Frontier, the nation's fourth largest wireline phone company.

According to Ostfeld, Frontier's sluggish stock price and its growing fiber position make it an attractive purchase target for wireless carriers, private equity companies and others.

Frontier wasn't immediately available to comment on the development, according to Reuters. A T-Mobile representative did not immediately respond to questions from Light Reading.

As noted by Reuters, private equity firms and infrastructure investors like KKR, Apollo Global, Searchlight Capital Partners, Macquarie Infrastructure Partners, EQT, Oak Hill and Ares Capital have all invested in fiber and telecom companies recently. 

Related:Frontier hints at out-of-footprint fiber buildout opportunity

Indeed, earlier this month Consolidated Communications entered an agreement to be acquired by Searchlight Capital and British Columbia Investment (BCI) in an all-cash deal valued at $3.1 billion.

The T-Mobile angle

T-Mobile's interest in fiber has been growing. The company inked an early fiber pilot in New York City with Pilot Fiber. More recently, T-Mobile expanded its fiber efforts into Colorado by working with Intrepid Fiber, a startup backed by global investment giant Brookfield Infrastructure Partners.

And just last month, Bloomberg reported that T-Mobile is in talks with Tillman FiberCo with a view to using that operator's fiber infrastructure as an anchor customer.

"We are thinking about whether or not there is a capital-light way to enter that [fiber] business and take advantage of our embedded customer base and our fantastic brand," T-Mobile CEO Mike Sievert said at a recent investor event. "If we can find a way to do something really accretive and exciting ... we will do it."

As for Frontier, the company counts almost 3 million customers, according to Leichtman Research Group. During the company's most recent quarterly conference call, Frontier officials reaffirmed the company's commitment to build fiber to 10 million locations inside its footprint by 2025.

And that commitment came just after Frontier securitized about 600,000 fiber locations in the Dallas area, a transaction that will provide the company with $2.1 billion of additional committed capital. With debt and other financing vehicles already in play, Frontier now has about $4 billion of liquidity, giving it the cash to fund operations through 2025, according to company officials.