Verizon would be wise to hold on $20 bln deal
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Saba
NEW YORK, Nov 4 (Reuters Breakingviews) -Verizon Communications VZ.N would be better off letting its fraying $20 billion fiber deal unravel altogether. One of the biggest shareholders in Frontier Communications FYBR.O is revolting against the broadband transmission company’s sale to the U.S. wireless titan. Others also have joined in to say it’s worth far more, but it isn’t to the buyer.
Two months ago, Verizon said it would pay $38.50 per share in cash for Frontier. The idea for boss Hans Vestberg is that extra fiber-optic network capabilities will help expand his company’s internet reach from about 18 million homes to 25 million.
It’s a curious strategic reversal. Verizon struck two separate deals in 2009 and 2015 to sell fiber-related assets to Frontier for about $19 billion. Frontier wound up in bankruptcy and emerged from it in 2021.
Despite the checkered history, Frontier shareholders are balking. Glendon Capital Management has said it intends to vote its 10% stake against the deal because, by its math, the company is worth 75% more, or twice as much as the stock’s all-time high. Cerberus Capital Management, which holds a 7% stake, also indicated it was unhappy, according to Reuters. Advisory firm Institutional Shareholder Services recommended on Friday that investors abstain from voting.
All the arguments are shaky. To take control of Frontier, Verizon is stumping up 37% more than where the market had been valuing the shares. The seller’s advisers sounded out a dozen potential suitors.
The price is already a stretch. Although Verizon’s estimated $500 million of cost savings, once taxed and capitalized, would be worth $3.9 billion today – 50% more than the $2.6 billion premium it is paying – the value of the deal remains questionable. Even if Verizon could wring out $700 million of cuts, the return on investment would be just 5%, according to Breakingviews calculations, well below its estimated 8% cost of capital. To avoid destroying value would require three times the projected synergies.
Other arguments are also vexing. New Street analysts, for example, contend that Frontier could be worth more than $100 a share. To get there, however, they use Verizon’s weighted average cost of capital instead of Frontier’s, which bucks conventional corporate finance logic.
The dissidents haven’t been persuasive. Frontier shares are trading about 8% below the offer price, an indication that investors are not expecting an interloper or sweetener from Verizon. And there’s no clear reason why Vestberg would bid against himself.
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CONTEXT NEWS
Advisory firm Institutional Shareholder Services recommended on Nov. 1 that Frontier Communications investors abstain from voting on the agreed sale to Verizon Communications for $20 billion.
Glendon Capital Management, which owns about 10% of Frontier Communications, said on Oct. 23 that it planned to vote against the deal.
Verizon said on Sept. 5 that it had agreed to buy Frontier for $38.50 per share in cash. Glendon estimates Frontier is worth as much as $68 per share.
Cerberus Capital Management, which holds more than 7% of Frontier, also thinks Verizon’s offer undervalues Frontier, according to a Reuters report on Oct. 15, citing unnamed sources.
Frontier plans to hold a special shareholder meeting on Nov. 13. A simple majority of them must vote in favor of the deal for it to proceed.
Frontier Communications' shares have stalled https://reut.rs/3NQmLoz
Editing by Jeffrey Goldfarb and Pranav Kiran
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