negotiationVerizon and Frontier reportedly are close to announcing a deal for Verizon to sell part of its landline business in California, Texas and Florida to Frontier.  And as the industry awaits an official announcement, there has been a lot of speculation about which company has the most to lose or gain from the deal.

Verizon reportedly plans to undertake the sale to generate cash to pay for the $10.4 billion in spectrum the company purchased in the AWS-3 auction that closed last week. According to one news report Frontier will pay $10 billion for the Verizon properties, which include operations that Verizon obtained when it merged with GTE 15 years ago. The properties to be divested reportedly include $5 billion worth of FiOS lines capable of supporting voice, video and data services.

The Expected Verizon- Frontier Deal
One research analyst who penned a note for Seeking Alpha argued that the deal should raise red flags about Verizon, which is short on cash because of the auction and because it paid $130 billion to Vodafone to acquire full ownership of Verizon Wireless. “Verizon selling assets to pay for spectrum is not something shareholders should embrace, as it still leaves the company with a mountain of debt and serious questions as to how it will pay those debts and dividends while also funding capex and participating in future spectrum auctions,” wrote that analyst, Brian Nichols.

A different analysis published by Seeking Alpha argued that Frontier is the one that could be going astray. “Albert Einstein said that insanity is doing the same thing over again and expecting a different result and we think that Frontier’s CEO Maggie Wilderotter has come down with a serious case of insanity for her willingness to buy whatever Verizon is selling,” wrote Sailbus Research in the other Seeking Alpha note.

As Sailbus noted, Frontier previously purchased landlines in 14 states from Verizon – and those lines generated a range of headaches for Frontier. For example the company had to spend significantly to upgrade rural lines in which Verizon had underinvested.

Although not mentioned in the Sailbus note, another concern was that although Frontier acquired some fiber-based FiOS lines from Verizon, Frontier had great difficulty absorbing FiOS video customers, citing unsustainable programming costs. The company didn’t have Verizon’s purchasing power and apparently was unable to negotiate competitive deals with content providers so opted instead to rely heavily on a deal with Dish Network for video service.

A More Positive View
Another way to look at Frontier’s situation, however, is to consider that the company most likely learned a lot from its previous Verizon purchase — knowledge that could help Frontier more easily navigate challenges this time around.

Frontier’s original deal with Verizon tripled Frontier’s size, according to Sailbus, making it the fifth largest wireline carrier in the U.S. at that time. Since then Frontier also has acquired lines in Connecticut, including some U-verse lines, from AT&T.

With an additional $10 billion purchase from Verizon on top of that, Frontier could be gaining some serious scale, potentially rivaling CenturyLink for the number three spot among landline carriers. And CenturyLink has its own video offering, suggesting that if it has the scale to support a video offering, perhaps Frontier could, too.

Verizon meanwhile is apparently expected to retain landline operations in the most populous parts of its original Nynex and Bell Atlantic local territories including states such as New York, New Jersey, Maryland, and Massachusetts.

Those lines support an important enterprise business for Verizon as well as supporting FiOS services, wireless backhaul and a wholesale business – so it isn’t as if the company is becoming completely wireless-centric.

Virtually no one expected Verizon and other wireless carriers to have to spend as much in the AWS-3 auction as they did. But not to have purchased spectrum could have jeopardized the company’s ability to support future traffic levels. Perhaps in retrospect the company would have pursued a different approach toward Vodafone’s part-ownership had it known the AWS-3 spectrum was going to cost so much.

But at this point, I would argue that the company is making the smartest move available to it considering its current situation.

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