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Verizon’s Frontier Communications Deal to Ease Leverage Pressure

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Verizon is selling profitable wireline assets to Frontier Communications

In the previous part of this series, we learned about Verizon’s (VZ) agreement to sell its wireline assets in three states to Frontier Communications (FTR). Now, we’ll look at some of the reasons why Verizon is rationalizing its wireline asset base.

As you can see in the chart above, the assets that Verizon will sell to Frontier Communications represented ~15% of Verizon’s revenues and ~18% of its EBITDA (earnings before interest, tax, depreciation, and amortization) for the wireline segment in 2014. These assets are more profitable than Verizon’s overall wireline division. These assets generated an estimated EBITDA margin of ~28% in 2014. However, Verizon’s entire wireline division had a ~23% EBITDA margin during the year.

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The wireline asset sale will help Verizon focus on East Coast operations

Despite higher profitability of these wireline assets, Verizon decided to sell these assets. According to the company, the expansion of these assets was a challenge. These assets are far away from Verizon’s East Coast operations. Also, the network in California and Texas has a significant copper base. Like AT&T (T), Verizon has been upgrading its copper network to fiber to provide high-speed Internet and video services.

Verizon will have more liquidity even after the spectrum transaction

Verizon recently bought ~$10.4 billion worth of spectrum holdings in the FCC’s (Federal Communications Commission) AWS-3 auction. The company will pay for this purchase from its cash balances and a ~$6.5 billion term loan.

Verizon will repay a large part of this loan from another recent transaction—the sale of its tower portfolio to American Towers (AMT) for an initial payment of ~$5.1 billion, subject to the completion of this transaction. However, Verizon’s wireline asset sale to Frontier Communications for ~$10.54 billion will improve Verizon’s leverage in 2016 if this transaction completes.

If you want to take on diversified exposure to Verizon, you can invest in the Technology Select Sector SPDR Fund (XLK). The ETF held ~5% in the company on March 19, 2015.

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