This Telecom Bet Big on Landlines...and Lost

Frontier Communications Corp.'s big bets on landlines are unraveling.

The once small phone company amassed $17 billion in debt by scooping up networks across the country from Verizon Communications Inc. and AT&T Inc. It was a contrarian strategy that Frontier could generate steady revenue from residential internet and video services even as wireless use exploded.

Instead, Frontier has been losing customers and scrambling to cover looming debt payments. The Norwalk, Conn., company recently slashed its dividend, and its shares have tumbled 69% so far this year. It plans a 1-for-15 reverse stock split on Monday, a move designed to keep its Nasdaq listing.

Frontier's troubles multiplied in spring 2016 after it closed a $10.5 billion deal for phone and internet lines from Verizon. The move nearly doubled Frontier's revenue and gave it millions of new customers in California, Texas and Florida. They included 1.6 million subscribers on Fios, a fiber-optic service that appeared lucrative but hid some snags below the surface.

"This last acquisition was largely about acquiring fiber," a strategy the company still supports, finance chief Perley McBride said. "It's just integration that didn't go well. When you double in size and you don't do it well, it's sort of up front and center."

Mr. McBride said he doesn't expect revenue growth anytime soon from the consumer markets acquired from Verizon last year. That is a reversal from the forecast of his predecessor, John Jureller, who in 2015 called the revenue trends "very positive."

Revenue has instead declined companywide for the past year. Frontier's 2016 loss widened to $373 million from $196 million a year earlier. The company plans to devote at least $1 billion this year on capital spending to keep its network humming.

"Cable companies are beating the pants off Frontier," said Jonathan Chaplin, an analyst for New Street Research, noting that companies like Charter Communications Inc. have invested more heavily in marketing, network equipment and customer service in the past three years.

The stiffened competition came just as Frontier faced pressure to cut costs, partly so it could pay for the networks it bought. The result was a series of network failures and complaints about customer service.

Compounding that challenge, Frontier said Verizon stopped writing off overdue accounts before the deal closed, saddling the acquirer with thousands of subscribers unlikely to pay their outstanding bills.

"Verizon is notorious for being very good sellers of assets," said Moody's Investors Service analyst Mark Stodden. The bond-rating firm recently downgraded Frontier's credit to B2, five steps below investment grade, citing "sharp subscriber losses" since the latest acquisition.

Verizon spokesman Bob Varettoni said the company's "objective was to concentrate landline operations in contiguous northeast markets to enhance operational efficiency, and to sharpen our strategic focus on wireless."

Other telephone companies who have acquired assets from Verizon have also suffered poor results. Verizon's former Hawaiian franchise filed for bankruptcy protection in 2008 after it was sold to a private-equity firm. FairPoint Communications Inc. declared bankruptcy in 2009 after it spent $2.3 billion on Verizon landlines in New England.

"If Verizon's selling assets, they're selling them for a reason," New Street's Mr. Chaplin said. In Frontier's case, "Verizon had taken those markets pretty close to saturation before they sold. That's the point at which they punted the assets to Frontier."

Verizon wasn't an unfamiliar business partner to Frontier, which paid $8.6 billion in 2010 to acquire the wireless carrier's landlines in 14 states.

Frontier's profits were barely growing in the years leading up to its latest deal, but its performance took a turn for the worse after the deal closed. It was the Fios business that undershot executives' rosy expectations the most as cancellations climbed.

Departing customers remain one of the company's most daunting challenges. "Frontier must reverse its subscriber trends to demonstrate sustainability to the bond market or it will face growing refinance risk" as it approaches $2.4 billion in debt payments due in 2020, Moody's wrote in a May 24 research report.

Frontier's executives say the business is trending in the right direction. Customer losses, excluding canceled past-due accounts, have eased. New managers include a former executive of Alphabet Inc.'s Google Fiber hired to improve network performance.

Mr. McBride said Frontier had an eye on the future when it bought landlines from Verizon and AT&T, each time gaining networks with a bigger share of high-tech fiber optics and fewer copper wires. "The company's always stuck to its knitting of fixed-line communications services rather than venturing out into mobile," he said.

Another carrier, Consolidated Communications Holdings Inc., also pinned its future on fiber, though it snapped up many assets for less money. Its acquisition of FairPoint closed earlier this month for $1.3 billion, including debt. Consolidated said the deal would cut the combined company's costs and support its dividend.

"Ourselves and Consolidated are sort of the last of the traditional telcos," Mr. McBride said. "But we can't operate that way."

(END) Dow Jones Newswires

July 08, 2017 07:14 ET (11:14 GMT)