Verizon in 'advanced talks' to acquire Frontier – report

　　Verizon is reportedly in "advanced talks" to acquire Frontier Communications, the telco that emerged from bankruptcy in the spring of 2021 and pursued a turnaround initiative that has largely hinged on a plan to upgrade about 10 million locations with fiber.

　　A deal could be announced this week, The Wall Street Journal (WSJ) reported Wednesday, noting that a deal for Frontier could give Verizon better competitive footing against AT&T, which has also embarked on its own fiber network-building initiative.

　　WSJ did not cite a possible price, but KeyBanc Capital Markets analyst Brandon Nispel estimated in a research note that the transaction could be worth around $18 billion.

　　New Street Research analyst Jonathan Chaplin said in a research note issued today that a Verizon-Frontier deal could draw counterbids from AT&T and T-Mobile, and that it might also accelerate an M&A wave for fiber assets among three national mobile carriers – AT&T, T-Mobile and Verizon.

　　Verizon and Frontier have been asked for comment on the WSJ report. Frontier shares jumped $10.59 (+37.77%) to $38.63 each in Wednesday afternoon trading. Verizon shares were down about 3.62%.

　　Word of a possible deal comes as Frontier undergoes a strategic review of its business that has included exploring potential partnerships, joint ventures, divestitures and mergers.

　　The WSJ report also arrives two months after a separate report that Frontier was in talks to form a joint venture with Stonepeak focused on supplying a capital injection of $500 million to $1 billion for use toward fiber investments.

　　Footprint includes former Verizon wireline assets

　　A Verizon play for Frontier wouldn't lack irony. The current makeup of Frontier includes former Verizon wireline assets, including former fiber-powered Fios networks, in parts of California, Florida and Texas that Frontier acquired in 2016.

　　Frontier has deployed fiber to more than 7 million locations. It added a record 388,000 fiber passings in Q2, putting it on track to build fiber to 1.3 million locations for full-year 2024.

　　In Q2, Frontier added a record 92,000 fiber subs, extending that total to 2.18 million. The company's average revenue per user (ARPU) for fiber hit $65.32 per month in Q2, up 3.5% versus the year-ago quarter.

　　The urge to converge

　　New Street's Chaplin said a deal for Verizon to acquire Frontier would help to underpin a fiber/wireless convergence strategy. He pointed out that Verizon has seen a 50% reduction in mobile churn and a 40% reduction in broadband churn when it bundles Fios with mobile.

　　And such a deal would give Verizon's fiber base a jolt. Verizon's got about 18 million fiber locations and has been expanding that footprint by about 500,000 per year. AT&T, by comparison, has about 28 million fiber locations and is building at a pace of 2.4 million per year, plus what it is getting from the Gigapower joint venture with BlackRock that is initially targeting 1.5 million locations outside of AT&T's legacy wireline footprint.

　　"If Verizon takes convergence seriously, they needed to do some big acquisitions to catch up. This one isn't enough; we suspect there will be more to come," Chaplin wrote. "AT&T has been much more focused on the value of fiber assets and the convergence imperative. Verizon seemed complacent. No longer."

　　KeyBanc's Nispel views a potential Verizon-Frontier deal as a negative for US cable if it means Verizon is taking more steps toward becoming a "converged" operator focused on pairing fiber and mobile.

　　Fiber M&A race underway?

　　New Street's Chaplin said he still expects the bulk of the nation's fiber assets to eventually be rolled into the three big national carriers. Still, word of a possible Verizon-Frontier deal comes as a surprise as he thought the bigger deals would not start in earnest until late 2025 or 2026.

　　"But we always knew that if one carrier started the process, others would have to follow swiftly because there are three wireless carriers and only one fiber asset in every market with a fiber asset," Chaplin explained.

　　T-Mobile is also amping up its fiber game with a couple of smaller joint ventures: Lumos and Metronet.

　　"T-Mobile's two acquisitions didn't strike us as the start of the scramble for assets, because they were small. Perhaps that was the start," Chaplin wrote. "Regardless, the race is properly underway now. Investors will turn their attention to other assets that could fall next."

　　Lumen, with its 3.67 million fiber locations, is the "big one," Chaplin noted. But he believes it'll be difficult for AT&T, Verizon or T-Mobile to make a run at Lumen until 2025 or 2026.