If you look at the address of TMC, you will see our headquarters operations are in beautiful Norwalk, CT. With thus take the announcement that AT&T has agreed to sell its wireline local exchange operations to Stamford, CT-based Frontier Communications (just down the road from us) with more than just a smidgen of passing interest.

The deal, subject to the usual reviews, is valued at $2 billion in cash.  It includes wireline network assets and consumer, business and wholesale customer relationships, and gives Frontier, with operations in 27 states, the opportunity to provide service in its home state.  

What $2 billion will buy you these days

Under the terms of the deal, AT&T will receive $2.0 billion in cash for the stock of its subsidiaries, The Southern New England Telephone Company and SNET America, Inc. Since ultimately Wall Street will decide if this is a fair valuation of the assets in question, it is worth taking a peek at what $2 billion gets you.  What Frontier will inherit in terms of customer relationships is more than 900,000 voice connections, including U-verse Voice over IP and traditional voice services delivered over access lines.  These include:

• Approximately 415,000 broadband connections, including about 245,000 U-verse High Speed Internet
• Roughly 170,000 DSL customers
• About 180,000 U-verse video subscribers

My colleague Gary Kim’s article on the tansaction has a more detailed analysis of how this break down in terms of the breakdown of consumer versus business lines, and what this means in terms of the competitive footprint Frontier will get. It is a nice slug of business despite the hotly competitive Connecticut market, currently representing about $1.2 billion in annual revenues.

It should be also noted that this is roughly less than 1 percent of AT&T’s annual revenues and thus are not very material to either their financial outlook, or the competitive one in this region from a wireline perspective.

For the historians in the crowd this operating area has been an outlier since the breakup of Ma Bell in 1984.  When the old AT&T was divested, SNET became part of what was then Regional Bell Operating Company (RBOC) Southwestern Bell. The company eventually took the AT&T name as its brand following a series of major acquisitions of its own. Competitive reasons back then did not put SNET into either RBOC NYNEX (serving New York and New England) or Bell Atlantic (serving the Mid-Atlantic states) who ultimately combined to form Verizon.  Even all those years ago the reasoning seemed odd and it has taken this long to find a suitable owner in-region for the local operations.

It should also be noted that AT&T is not leaving Connecticut, it is just getting out of the wireline business.  AT&T stated that, “AT&T remains committed to having a significant presence in Connecticut, with employees, operations and investment to provide wireless service on the nation’s fastest and most reliable 4G LTE network, and networking, application solutions and professional services for Connecticut business customers.

AT&T says sales proceeds will, in part, be used to further AT&T’s plan to transform its operations — through Project VIP — to an all-IP, wireless and cloud network. Project VIP is an ambitious program that is designed to expand the AT&T 4G LTE network to 300 million in its remaining 21-state wireline service area, to expand U-verse Internet and video services to more customer locations, and deploy its fiber network to more business customer locations.

Human assets involved in the transaction include about 2,700 wireline employees, and Frontier has agreed to honor the existing collective bargaining agreement for employees represented by the Communications Workers of America.

The transaction is expected to close in the second half of 2014.

“This is a good business decision for both companies, good for customers and good for Connecticut,” said Patricia Jacobs, President-AT&T New England. “We will continue to invest in Connecticut to serve our wireless and business customers, will maintain a significant employee presence here and will continue to be involved in the community. The fact that Frontier is headquartered in Connecticut will help ensure a smooth transition for customers and employees.”

 “Throughout this process, we’ll work closely with Frontier to ensure a smooth transition for our customers and employees,” Jacobs said. “And until we close the deal and transition customers to Frontier, we’ll continue to operate business as usual, delivering the great service our customers expect from us.”

Maggie Wilderotter, Frontier's Chairman and Chief Executive Officer said, "We are excited to be acquiring AT&T's wireline operating company in Connecticut, where our company has been headquartered since 1946. This is a great opportunity to bring to Connecticut Frontier's portfolio of products and services, such as Frontier Secure, our industry leading digital security offering that gives customers top-rated online computer protection and premium technical support. It also allows us to introduce our local engagement management model to Connecticut in which Frontier employees provide high-quality service to their friends and neighbors and become actively involved in their communities."

Frontier for its part also cited following benefits for its shareholders, customers, local communities and employees:

• The transaction is estimated to be accretive to Frontier's adjusted free cash flow per share in the first year.
• The transaction is estimated to improve Frontier's dividend payout ratio by more than 5 percentage points in the first year.
• The all-cash transaction means Frontier shareholders will receive the benefit of increased diversification of assets and operations without any dilution in ownership.
• Frontier will have greater scale to leverage its network, information technology, engineering, administrative services and procurement capabilities to realize cost synergies and savings of $200 million annually once integration is complete.
• Frontier will implement its proven local engagement community-oriented go-to-market strategy in Connecticut led by local General Managers and a State Leader.
• Connecticut customers will have the same products and services that they currently enjoy, including the U-verse suite of products.

It is difficult to see this deal as much more than a rationalization of non-core assets by AT&T and the addition of a much desired local presence for Frontier.  In other words, this does not a harbinger of further industry restructuring in the US.  It is also not an indication of a divergence of service provider interests in pursuing wireless versus wireline.  In fact, an argument can be made that going forward service providers are in the business of creating a “never leave our network” approach.  This means being positioned to offer quadruple play for connectivity, and leveraging this in their battles with OTTs for additional value-added services.

AT&T selling SNET’s assets to Frontier, while remaining an important wireless player in Connecticut speaks actually to a bit of urgency on various parties to get the best strategic alignment of physical assets to fill in critical service holes.  For AT&T this is Project VIP, and for Frontier Communications it is about being the home team.

Was this a reasonable price for Frontier to pay?  As noted, the financial market will determine this, and as in residential real estate transactions it will become the latest “comp” for deals down the road. However, there are also emotional and strategic aspects for both parties which are difficult to put a price on, so this may not be the best yardstick to use.