Frontier Communications Corporation's Worst Move in 2016 So Far

By Markets

Image source: Frontier Communications.

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Telecom company Frontier Communications (NASDAQ: FTR) has gone through major changes in recent years. Starting as a tiny telecom with a focus on rural areas, Frontier has made large acquisitions of assets from some of its bigger telecom rivals in order to build up scale and become more competitive. Yet its latest deal with Verizon to purchase assets and obtain millions of new subscribers in Texas, Florida, and California carried a $10.5 billion price tag, and after that deal was complete, Frontier management decided that it made sense to shift gears. Although the explanation the company has given made sense, the move could prove to be premature and close doors to future acquisitions that might have made Frontier even stronger. Let's take a closer look at what Frontier did and why.

Making big changes at the top

Frontier recently announced that John Jureller had agreed to step down as chief financial officer, making way for Perley McBride. In the company's press release, Frontier said that Jureller had decided to pursue other opportunities, and CEO Dan McCarthy thanked the departing CEO for his four years of service to Frontier and his role in facilitating the large acquisitions that Frontier made during that time span.

Yet McCarthy went into more detail with investors at a recent conference on the telecom industry. The way he put it made it clearer that the decision to replace Jureller was more strategic from the company's standpoint:

"After three long, hard years of M&A, integration, financing activities, all different things, ... it really dictated me to sit down and decide, 'What is the right skill set really moving forward?' And I sat and talked to [CFO] John [Jureller], and we talked about his skill sets. ... We both decided it was the right time to make the change. I was looking for a CFO that really was very operational, someone who understood telecom intimately, who could bring a view externally to us, but still wasn't going to be a long ramp as far as intimacy with Frontier and the industry."

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Perley McBride was the perfect person in McCarthy's eyes, and the timing couldn't have been better. McBride had just completed his role for telecom peer Cable & Wireless and was available to rejoin the Frontier team.

The CFO change is just one example of the wider-ranging shifts that Frontier has implemented in recent months. In July and August, Frontier promoted one mid-level executive to the role of senior vice president in the eastern part of Southern California, added two commercial sales leaders to its southeast region, appointed an engineering and technology senior vice president for its western region, a general manager for its operations in the Mountain West, and named several other leaders in various parts of California.

What's ahead?

McCarthy said there are no other significant changes expected on the senior management team, but in the CEO's words, "You should expect evolution of the company." That could mean more shifts in the distant future.

Yet skeptics argue that Frontier isn't large enough to pause and consolidate its rapid growth. Even after its massive acquisitions, Frontier is just a fraction of the size of Verizon and other industry giants, and competition will keep ramping up throughout the industry. Frontier risks getting left behind if it can't keep up, and it can't afford to pass up opportunistic strategic acquisitions simply because it's still digesting its past transactions.

From Frontier's perspective, pressure to figure out its long-term path to success is likely behind the personnel changes. Frontier has a huge amount of debt to manage, and that debt load only got worse after the most recent Verizon asset acquisition. Even though Frontier has done a good job of spacing out the maturity dates on its debt to facilitate future refinancing and pay-downs, the emphasis on finding cost savings internally shows how important it is to Frontier to make itself financially viable. That will not only bring future success but also keep creditors happy in the near future.

It's unfortunate that Frontier has had to change directions and give up on a business model that has made it a much larger company than it was in the past. What most investors hope is that after a relatively short period, Frontier can return to the business model that will boost its size the most and put it in the ideal competitive position to fight its rivals in the years to come. If that doesn't happen, then the shift could prove to be Frontier's worst move of the year, dooming it to slower growth and potentially missing out on chances to become an even more important player in the industry going forward.

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