Back to the Future
May 15, 2009
It’s Back to the Future for me – just like the movie.
The big media buzz of Verizon selling select rural wire line (copper) facilities to Frontier Communications over 14 states for $5.6 billion in Frontier stock is the latest indicator that a consolidation cycle is starting and credit markets thawing. Though this deal won’t see Free Cash Flow positive for Frontier Communications for two years, it is the right strategic move for both companies. For an RLEC transaction, the EBITDA multiple is very good.
Verizon is focusing on the higher growth population centers and gains from the divestment of rural facilities that no longer accommodate Verizon. This also lessens any argument that Verizon is a menacing monopoly by way of this divestment.
Frontier Communications benefits from scale as they specialize in more rural areas to the extent they gain more proficiencies by integration. Frontier Communications does not serve the most rural of rural locations, so don’t expect any effort to deliver broadband to the barn, Green Acres or Petticoat Junction. It’s a great consolidating play for Frontier Communications, especially using stock as a currency, leaving the ability to lever debt off of EBITDA flows as a viable option/hedge.
Why is it back to the future for me? Well, way back in the early 1990’s, I was the first President of Frontier Communications well before the Communications Act of 1996. Once again, I will find myself holding Frontier stock as a result of this transaction since I hold Verizon stock. I am more confident this time that my stock quality will sustain itself, as the last time I held Frontier stock, the bandits from Global Crossing bought Frontier Communications, and in very short order destroyed shareowner value, the wealth and pensions of thousands of people. And no one went to prison.
I would like to share with you, my gracious readers, a funny story as an aside to this transaction (at least for me). If you go back to the 1990’s, the really big thing back then was long distance carriers. Hundreds, if not thousands of them existed. In the mid-1990’s, a consolidating cycle amongst these carriers had commenced as there was an over supply of carriers (capacity) that drove long distance prices so low, that you either merged for cost synergy or went bankrupt.
During this time of long distance consolidation, I participated in the Frontier Corporation M&A meetings discussing various targets or strategies. My invite was eventually lost in the mail.
If you have read the blog for sometime now, you know I don’t buy into the lemming model of business (move as a group to mitigate risk in the eyes of Wall Street…after all, if everyone is doing the same thing, it must be the right/safe thing to be doing. And, Wall Street, of course, being the fee-based vultures they are, happily endorses such paradigms.) Myself, I prefer contrarian moves and innovation.
Back to the M&A meetings: My first meeting, I went and listened. After all I was the new guy from “outside” the phone company and I wanted to take in the ambience. The second meeting, I raised my hand and made a suggestion. That suggestion was not to focus on buying into the over-supply of long haul carriers which drove prices into the ground, but instead to focus on acquiring local operating companies that already own infrastructure who are a gateway to the multitudes of long distance operators. My simple mind theory on this approach was that once prices go down, they usually don’t go up – integration synergies will keep the price wars going as things consolidate. I was told: “Dave that’s an interesting idea.” And the discussion continued on acquiring long haul carrier interests.
The third meeting I attended, I listened attentively again. Once again, I suggested a contrarian focus on acquiring local operators, this time my logic was that it had been my experience that those whom are closest to the customer have a better relationship and competitive advantage over those that are more distant – like in long distance. I was told: “Dave–that’s an interesting idea.” And the discussion continued on acquiring long haul carrier interests.
The fourth meeting…well there was no fourth meeting for me. Somehow my name fell off the e-mail invitation list. Several months later, Frontier merged (acquired) a major long distance carrier.
Today, as we know, long distance is near free with services such a Vonage, VOIP, Skype and MagicJack rapidly driving all-you-can-eat long distance services at flat rates across the globe. Flat rate all-distance is not far behind.
Since waking up with Back to the Future, my biggest worry now is waking up in Ground Hog Day – just like the movie. There is nothing brewing, but the Ground Hog irony of this adventure would be if Frontier Communications were ever to acquire American Fiber Systems because of our local presence, unique fiber assets, lucrative ARPU’s and our focus on being closest to the customer!
Talk about crazy!
Written by Dave Rusin - Telecom Executive
Posted by wbrache | Filed Under American telecom, Telecom Blogs, Telecom broadband, Telecommunications blogs, Telecommunications companies, Telecommunications industry, Telecommunications news, Trends + telecommunications, Trends in telecommunications
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