Verizon Communications Inc. (NYSE: VZ) has announced plans to acquire Frontier Communications Parent Inc. (NASDAQ: FYBR) for $20 billion in cash, valuing each Frontier share at $38.50.
However, despite the high valuation, Frontier’s stock fell 10% to $35.10 in premarket trading on Thursday.
This drop suggests investor concerns that the deal may face regulatory obstacles.
Verizon’s CEO, Hans Vestberg, addressed these concerns during an interview with CNBC, stating that while regulatory scrutiny is expected, he remains optimistic about the deal’s approval.
Vestberg emphasized that the acquisition represents a “great deal for everyone” and a strategic fit for Verizon, expanding its premium fiber network.
Key highlights of the deal
- Increases scale with 2.2 million fiber subscribers and will extend Verizon’s network reach to 25 million premises across 31 states and Washington, D.C.
- Transaction valued at $20 billion, expected to be accretive to revenue and Adjusted EBITDA growth upon closing
- Projected to generate at least $500 million in annual run-rate cost synergies
Will the Verizon-Frontier deal face regulatory hurdles?
Vestberg described the Frontier acquisition as a key strategic move that will extend Verizon’s fiber network reach.
He downplayed the regulatory risk, noting that there is minimal overlap between Frontier’s network and Verizon Fios, which could smooth the approval process.
Verizon anticipates that the acquisition will be immediately accretive to both revenue and EBITDA.
However, integration costs in the first year may delay any significant impact on cash flow and earnings per share (EPS) for 12 months post-closing.
Despite the initial costs, Verizon expects the deal to enhance its financial outlook, potentially boosting its stock value over time.
Following the acquisition news, Verizon shares saw a modest uptick.
Analysts are not all praise on VZ-FYBR transaction
While the acquisition positions Verizon to bring the “largest pure-play fiber internet provider in the US.” under its umbrella, some analysts are less enthusiastic.
Walter Piecyk of LightShed Partners expressed doubts, noting that even with the acquisition, Verizon will still lack a fiber-based home broadband solution in over 80% of the US and will continue to trail AT&T’s fiber network footprint.
Craig Moffett of MoffettNathanson was even more critical, calling the deal “an absolutely atrocious idea.”
In his research note, Moffett argued that while the acquisition is a positive exit for Frontier, it does little to improve Verizon’s modest fiber footprint in the US.
He also questioned the strategic value of the acquisition, suggesting it won’t significantly change Verizon’s competitive position.
MoffettNathanson currently rates Verizon stock as “neutral” with a price target of $43, indicating limited upside.
However, Verizon’s attractive dividend yield of 6.41% continues to make it appealing to income investors.
Before the acquisition, Moffett had set a $30 price target for Frontier, which is already trading above that, fueled by the acquisition news.
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