Yesterday afternoon, Verizon (VZ, Financial) was reported to be nearing a deal to acquire Frontier Communications Parent (FYBR, Financial), causing FYBR shares to soar by 38%. This morning, the companies confirmed the $20 billion deal with VZ agreeing to pay $38.50 per share in an all-cash transaction. However, FYBR shares are trading below this buyout price due to uncertainties surrounding shareholder and regulatory approvals.
Key Points:
- Shares of VZ dropped nearly 4% since the news broke. The decline is not due to dilution concerns, as the acquisition is being financed with cash. Instead, the market is worried about VZ's use of capital and its high debt balance, which was $146.8 billion as of June 30, 2024.
- FYBR, which emerged from bankruptcy in 2020, had a total debt of over $11 billion at the end of 2023 and has had negative free cash flow for the past three years. This debt will be added to VZ's balance sheet if the transaction goes through, increasing VZ's financial strain.
- VZ announced a small dividend increase to $0.6775 per share from $0.665 per share, signaling the safety of its dividend despite the impending $20 billion expenditure and potential additional debt.
- Strategically, the acquisition is beneficial for VZ as it would significantly expand its fiber broadband business. In Q2, VZ saw a 13% decrease in wireless upgrades but added 391,000 broadband net additions, marking the eighth consecutive quarter with over 375,000 net additions.
- FYBR's fiber broadband business was also strong in Q2, with a record addition of 92,000 fiber broadband customers, an 18.6% year-over-year increase. The high-speed internet business is expected to continue thriving, especially with the rise of AI technologies. The combined VZ/FYBR entity would have approximately 9.1 million consumer fiber subscribers, making it the largest pure-play fiber internet provider in the U.S.
- Financially, the deal is attractive as it is expected to be accretive to adjusted EBITDA and revenue growth rates upon closing. VZ anticipates realizing at least $500 million in run-rate cost synergies by year three, thanks to increased scale and distribution benefits.
The main takeaway is that acquiring FYBR would position VZ as a leading broadband company, giving it a competitive edge over AT&T (T, Financial) and T-Mobile (TMUS, Financial). While the investment in its fiber footprint is strategically sound amid rising data usage and AI technologies, it will further leverage VZ's balance sheet as it takes on FYBR's debt.
