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January 20, 2014

Frontier sees upside in CT’s competitive telecom market

Contributed photo Daniel McCarthy, Frontier's chief operating officer

AT&T lost tens of thousands of Connecticut wireline customers over a five-year stretch starting in 2008.

So why, in the face of an industrywide trend of cord cutting, did Frontier Communications announce plans last month to buy AT&T's Connecticut residential, commercial and wholesale wireline business for $2 billion?

For one, Frontier believes it can run the operation cheaper and more efficiently than AT&T, which has decided to shift focus to its more profitable wireless service.

Just as important, the deal allows Frontier to gain a foothold in a new market fertile with customers it can cross-and up-sell too. Despite its Stamford headquarters, Frontier currently has no New England customers. The AT&T acquisition would give it about 900,000 voice and 450,000 data customers in Connecticut.

Frontier executives acknowledge landlines aren't likely to make a big comeback, so the company has been increasing emphasis on its Internet business, rolling out new residential security products and bundled offerings.

In recent quarters, Frontier has made gains in broadband subscriptions while pushing its bundled phone-Internet-cable packages to consumers within its 27-state footprint. The merger savvy company is betting those services will gain traction in Connecticut too.

Daniel McCarthy, the company's chief operating officer, said in a recent interview that Frontier plans to try to grab market share — and possibly win back some cord cutters — through a combination of smart product pricing, geographic sales organization, and spending $60 million to upgrade Internet speeds in Connecticut's rural areas with the hopes of upselling customers.

“We're going to introduce products designed for cord cutters,” McCarthy said.

Frontier has had recent success in other states with its “Simply Broadband” offering, which it rolled out in 2012. The product, priced at $29.99, includes a wireless router at no additional charge — a modest but somewhat rare perk that may just pique the interest of customers looking to make a change.

David Cadden, a professor of entrepreneurship and strategy at Quinnipiac's school of business, said such products could work on consumers tired of ever-climbing prices for cable and Internet. “I think people have gotten a belly full of local nonmarket forces with regard to cable,” Cadden said.

While it has struggled like other telecoms with subscriber churn, Frontier's broadband business has grown stronger with the help of its Simply Broadband offering.

The company added a net 84,500 broadband customers through the first three quarters of its current fiscal year, far surpassing the 18,140 it added over the same period of 2012, financial filings show.

“We've had some great success in bringing that product to the market,” McCarthy said.

Frontier, however, is entering a state that's relatively saturated with broadband access (over 90 percent), and includes heavy competition from the likes of Verizon, Comcast, Cox and Charter. Competition will also be fierce with business service providers like Verizon, Fibertech, Lightower and others.

Even AT&T would remain as a competitor in the business services category — the telecom giant will continue to sell voice-over-IP, long distance voice and other services in the state.

“AT&T's business in the Northeast is increasingly wireless and advanced communications solutions for business customers,” Patricia Jacobs, AT&T's New England president said in an emailed statement. “Frontier's focus is on operating incumbent local exchange companies in markets like Connecticut. That's why this is a good business deal for both companies.”

However, the deal also allows Frontier to use AT&T's U-Verse triple-play offering and potentially bundle some AT&T wireless products with its own. Frontier also plans to spread its sales operations into five zones around the state, each overseen by a general manager. Its head of state operations would be based in Hartford, McCarthy said.

Long-Time Acquirer

Frontier, which was founded in 1935 as Citizens Utilities Co., is well practiced in acquisitions and has a long history of aggressive deal making. After acquiring about 2 million lines nationwide in a dozen transactions in the 1990s, the company split off its utilities business and changed its name to Citizens Communications in 2000. A year later it bought Frontier Corp. and its 1.1 million phone lines for $3.6 billion.

After changing its name to Frontier Communications, the company orchestrated an $8.5 billion deal in 2009 to acquire access lines in 14 states from Verizon, more than doubling its national footprint.

Now, in its first major deal since then, Frontier is hoping to leverage that experience to achieve savings in Connecticut.

Frontier executives said they can find $200 million a year in synergies and cost savings by its third year of ownership in the state.

“When the day is done, we operate at a much lower cost structure [than AT&T],” McCarthy said.

Finding Savings

For its $2 billion in cash, Frontier would get not only AT&T's customers and the wireline infrastructure (previously known as the Southern New England Telephone system), but also 2,700 mostly unionized AT&T employees, service vehicles and more than 400 offices and facilities spread across Connecticut.

Donna Jaegers, a telecom analyst with D.A. Davidson & Co., said she expects Frontier to shave costs by converting the SNET system to its own, allowing for simpler maintenance and engineering.

Between cord cutting, competition and the $1.9 billion Frontier may borrow to finance the deal, Jaegers said the company will have its work cut out for it in Connecticut.

“When you're a fixed-line operator and business is declining and debt load is high, you can't just sit there and let the inevitable happen,” she said. “They want to grow faster and stabilize the company as they pay down debt.”

Frontier has pledged to keep staffing levels the same and honor union contracts, but Jaegers said she expects the company to ultimately trim its Connecticut workforce.

“In general, wireline telecom is seeing continued pressure on its sales, so if there are less lines to serve, the companies tend to cut down on headcount,” Jaegers said.

William Henderson, president of the Communication Workers of America Local 1298, which represents Connecticut AT&T workers, said his union has met with state regulators, who need to approvde the deal, to share concerns about potential job cuts. CWA has also hired an attorney and financial analyst to discern what Frontier's financial position portends for worker benefits.

“Can they afford a benefit plan? Can they afford a pension plan and these types of things going forward?” Henderson said.

Still, Henderson remains somewhat optimistic because Frontier said it would not outsource operations to other states or countries. That could even mean a return of some dispatch jobs to Connecticut, Henderson said, where CWA has lost two-thirds of its members over the past decade.

Read more

AT&T unloading CT wireline assets for $2B

Frontier downgraded on $2B telecom play

Frontier asks CT regulators to approve AT&T deal

Frontier clears first AT&T acquisition hurdle

Frontier's 4Q profits up on lower costs

Lower revenue, AT&T acquisition costs hit Frontier profits

Frontier launches landline texting

Frontier swings to profit in 2Q

Frontier promises $63M in CT infrastructure investments

Frontier: AT&T’s CT wireline business netted $237.6M in profits

Frontier’s AT&T deal complete

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