Verizon/Frontier Intervention

CWA has intervened in the proposed sale of rural properties by Verizon to Frontier to protect the interests of the consuming public and its members. Before we took this action we weighed both the potential benefits and possible liabilities of this purchase should it be approved. After careful evaluation we believe the negatives far outweigh any positives that could result from the sale.

The positives for Frontier are:

·                          It will become a much larger company with increased revenues and purchasing power.

·                          The increased size and purchasing power will give it additional leverage in negotiating with its suppliers for both products and materials to maintain and expand its network and support services.

·                           It will also gain some economies in reducing overhead costs in supporting a much larger customer base.

If all of these things are true one might ask why is this bad deal? First we start with the properties it is acquiring from Verizon. The properties are generally, with a few exceptions, rural service areas with low customer density. For an extended period of time these properties have suffered from under investment by Verizon. This means Frontier will have to make significant investment to bring the quality of service up to more acceptable levels and expand broadband as it has committed to do in its public statements.

 Currently the rate of access line loss in some of these Verizon properties is approaching or exceeding double digits. These properties are also seeing increased levels of competition. This means Frontier will be pressed to invest heavily and quickly if it is to stem this line loss and preserve the customer base.

The ability to invest is highly questionable. 

-          Frontier is currently paying out more in dividends than it is earning and proposes to continue this practice even if this transaction is approved.

-          It will also take on significantly more debt in order to finance this purchase. The current high level of subsidies it receives from the Universal Service Fund to provide services in high cost service areas will also be much lower for these properties it will acquire from Verizon.

Frontier projects it will be able to cut operational expenses by $500 million. This projected savings is highly questionable. It is a projected savings of 21% which is much higher than those projected in the Verizon sale to Fairpoint or the CenturyTel merger with Embarq.

There are also issues with the ability of Frontier to manage a company that will triple in size. If the transaction is approved Frontier will instantly grow from 2.2 million access lines to 7 million. It will also immediately have an increase in employees from 5,700 to 16,700. While Frontier has grown thru acquisition in the past it has not done so on the scale of this transaction.

What does all this mean for current customers and employees of Frontier?  With the financial constraints Frontier will have as a result of the new debt and declining Universal Service Fund support it is questionable whether it can actually meet the commitments it is making.  It simply will not have the resources to do all things and the probability is its existing customer base will suffer from a lack of investment. This lack of investment could mean either current customers wait longer for improvements in service or they simply get service from a competitor. There is a real potential for an increased rate of access line loss and a continuing decline in revenues and resulting reductions in employment. This scenario is very similar to what is actually occurring with the Fairpoint purchase from Verizon in New England.

While Frontier will be a bigger company as a result of this proposed purchase, bigger is not always better. We all have seen the results of transactions like this that have not been well planned or well executed. This transaction as best we can determine was conceived and executed over a two month period. This seems an extremely short period of time to put together a deal of this complexity. The devil is always in the details of all transactions and we have yet to be convinced that Frontier has a sufficient grasp of the details to make this purchase successful.