To steal from the lyrics of the insanely popular song from Disney’s hit movie Frozen, Verizon in a major restructuring move has decided to “Let it Go!” The company has announced not just one but two blockbuster transactions which will give it $15.54 billion to fund realignment moves designed to sharpen their business “focus.”
The transactions are as follows:
Verizon has reached a definitive agreement to sell its local wireline operations serving customers in California, Florida and Texas to Frontier Communications. Frontier will pay Verizon approximately $10.54 billion (some $9.9 billion in cash, plus $600 million in assumed debt) for the business and related assets in these states.
Verizon has agreed to lease the rights to more than 11,300 of its company-owned wireless towers to American Tower Corporation, which will also purchase approximately 165 Verizon towers, for a total upfront payment of about $5 billion.
Simultaneously, Verizon is returning a significant amount of capital to its shareholders through a $5 billion accelerated share-repurchase program.
Billions to Play With
On almost every industry observer predictions list this year has been one that says 2015 is poised to be a record one for merger & acquisition activities and other industry structure recalibrations. The phenomena will be global and these two, along with some of the jockeying in Europe, are likely going to be at the top of the list in terms of dollars at the end of the year.
The Verizon moves come at what can be considered one of the most turbulent times in telecom industry history. It is a time where a perfect storm of competitive, technological and public policy developments here in the U.S. could rival all of the commotion surrounding the breakup of AT&T and the subsequent rewriting of the Communications Act in 1996 and the consolidation of the then-seven RBOCs. Indeed, the decision to get out of the fixed business in three of the biggest states in the country in favor of a mobility focus is breathtaking. It in essence leaves Verizon in the wired broadband business in the lucrative Middle Atlantic and Northeast states, the foundation of the company when it was created from the merger of RBOCs Bell Atlantic and NYNEX.
“Our long-standing strategy has been to consistently invest in our networks, improve our customers’ experience, and develop new products and services while delivering profitable growth,” said Verizon Chairman and CEO Lowell McAdam. “These transactions will further strengthen Verizon’s focus on extending our industry leadership position in our core markets and return significant value to our shareholders.”
Here are the details of the transactions as presented by Verizon in justifying the moves. Read them and ponder the impact:
Details of the Verizon - Frontier Transaction:
Selling wireline operations in California, Florida and Texas to Frontier will concentrate Verizon’s wireline operations on the East Coast. Verizon will focus on further penetrating the market for its FiOS business across a contiguous footprint in Eastern states.
Frontier currently has access lines in 28 states, providing an array of voice, broadband and video services, including landline assets purchased from Verizon in 2009-2010.
Maggie Wilderotter, Frontier’s chairman and CEO, said: “These properties align with Frontier’s disciplined strategic focus and enhance our footprint with rich fiber-based assets. We look forward to building on the strong results Verizon has delivered in these three states. Frontier has a solid track record of successful integrations, and we welcome the new employees who will help us implement our local engagement model in these markets.”
Completion of the transaction is subject to customary closing conditions including, among others, obtaining certain regulatory approvals. The companies are targeting completing the transaction in the first half of 2016.
Approximately 11,000 Verizon company employees are expected to continue employment with Frontier after the transaction. Frontier and Verizon will provide a smooth transition for these employees.
Frontier is acquiring all of Verizon’s local wireline operating territories in California, Florida and Texas. At the end of fourth-quarter 2014, these operations served approximately 3.7 million voice connections; approximately 2.2 million high-speed data customers, including approximately 1.6 million FiOS Internet customers; and approximately 1.2 million FiOS Video customers.
The transaction does not include the services, offerings or assets of other Verizon businesses, such as Verizon Wireless and Verizon Enterprise Solutions.
As of the end of fourth-quarter 2014, the consumer and mass business wireline operations that Verizon is retaining provided service in nine states and the District of Columbia and had approximately 16.1 million wireline voice connections; 7.0 million high-speed data customers, including approximately 5.1 million FiOS Internet customers; and 4.5 million FiOS Video customers. The states in Verizon’s contiguous consumer wireline footprint are Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and Washington, D.C.
Credit Suisse, Guggenheim Securities and PJT Partners advised Verizon on the transaction.
Details of the Verizon - American Tower Transaction:
In the wireless tower transaction, American Tower will have exclusive rights to lease and operate over 11,300 Verizon cell towers, a significant majority of the towers the company currently owns. In addition, Verizon will sell approximately 165 towers outright.
The average term of the lease rights is about 28 years. As the leases expire, American Tower will have fixed-price purchase options to acquire these towers based on their anticipated fair market values at the end of the lease terms.
Verizon will sublease capacity on the towers from American Tower for a minimum of 10 years for $1,900 per month per site, with annual rent increases of 2 percent. Verizon will have customary renewal options that could potentially extend the full term of the sublease to 50 years.
Verizon will have access to additional reserve capacity on the towers for future use and expects to use this additional capacity to help continuously improve the nation’s most reliable network.
During the terms of the leases, American Tower will have full operating rights to and responsibilities for the towers. American Tower’s rights will include the ability to sublease other available space to other companies.
Verizon expects the transaction to close by mid-2015, subject to standard closing conditions.
$5 Billion Returned to Shareholders Through Share Repurchase
Under the terms of the accelerated stock repurchase (ASR) agreement, Verizon will repurchase $5 billion of its common stock and expects to receive an initial delivery of shares having a value of approximately $4.25 billion. The total number of shares that Verizon will repurchase under the ASR agreement will be based generally upon the volume-weighted average share price of Verizon’s common stock during the term of the transaction.
Final settlement of the transaction under the ASR agreement, including delivery of the remaining shares that Verizon expects to receive, is scheduled to occur in the second quarter of 2015. Verizon is funding the ASR with cash on hand.
The ASR is in addition to Verizon’s three-year share repurchase program announced on March 7, 2014. Under the three-year program, Verizon is authorized to repurchase 100 million shares of its common stock. That program is set to terminate on Feb. 28, 2017, or when the aggregate number of shares purchased under the program reaches 100 million, whichever date is earlier. To date, no shares have been repurchased under the program.
Shrinking to grow, operational efficiencies and a bonus to shareholders
In evaluating all of the moves, give credit where it is due. Putting aside the valuation of the assets being sold, shrinking the fixed-line footprint makes strategic sense. With the need to finish the promised build-out of FIOS in the remaining areas and the need to have cash to be a major player in wireless auctions, this is a win-win. Verizon gets out of disparate markets where it is not the dominant landline carrier and gets a substantial chunk of its workforce off the books. For its part, Frontier continues on its path of becoming a national presence both intra-state and across the U.S.
The decision to sell the towers to American Tower and lease most of them for a very long time also seems wise at this point. It will allow Verizon the connections its needs at what one can only assume will be favorable terms, and again will enable them to trim the workforce. After all, what amounts to outsourcing certain parts of one’s business to those who have core competencies is nothing new. Plus, this is a very nice deal for American Tower as those towers can be used not only for Verizon but others. In short, this is another one that can be put in the win-win category.
Interestingly, several decades ago when I was at Probe Research, I was co-author of a book, “The End of the RBOCs”, which advocated that the seven “Baby Bells” would be smart to divest their outside plant and concentrate on delivering value-added services as they evolved their core networks. Back then we said Wall Street would love this, and it would help spur innovation as a new outside, plant-focused company could optimize the infrastructure by becoming a local carriers’ carrier. In fact, it might have short-stopped some of the mess we are now in with net neutrality.
As to letting shareholders have a piece of the action, the simple answer is why not? Executives are always looking to increase shareholder value and attract investors and this is a good move.
I will concede as a FIOS and Verizon Wireless customer that it is my hope that the monies raised will actually go intro improving the network. For example, in my home town of Ramsey, New Jersey, despite the fact that one of the major highways in the state runs less than half a mile from our downtown, Verizon Wireless service is spotty to say the least because downtown is over a hill from the highway.
In addition, while shareholders are getting a break (I am not one), given how fast the costs of triple play services have escalated, it might be nice to reward current and not just new customers a price break. This also goes for the wireless side of things where I keep waiting for Verizon and others to strike back at Sprint’s latest ploy of advertising if you switch to them the price will be half of Verizon and AT&T. Unfortunately, I am not holding my breath on that one.
In conclusion all of the Verizon moves, while they seem to have caught some as a surprise, strategically make a lot of sense. They have the added benefit of not raising a competitive red flag for industry regulators for obvious reasons.
Will AT&T follow suit? Will Google, a CLEC consolidator or a cable MSO like Comcast, an entity from an adjacent market or even an entity nobody thinks is a player from some other market like an electric utility, look to grab off fixed wireless assets of not just Tier 2 and 3 but now Tier 1 fixed-line operators? What will the ultimate decision about net neutrality have on such moves and further industry restructuring and asset valuations?
The answers to these and many more questions remain chapters to be written with very uncertain outcomes. What we do know is that the telecommunications infrastructure business globally is engaged in a very high stakes game of musical chairs. It seems like the next 12 to 18 months are going to be critical in determining industry structure for many years to come. Who ends up sitting in chairs when the music stops is going to be a subject of intense speculation that has the financial services company champing at the bit to obtain transactional fees. In fact, it is fair to say that financial advisors are a sure thing to do well as the industry restructures, but whether specific companies and we as consumers end up being winners is problematic at best.
Stay tuned! It is going to be a bumpy ride to say the least. It is only February.
