Rationale behind the sale
In the previous part of this series, we learned that the FCC (Federal Communications Commission) has given a go-ahead on the Verizon (VZ)—Frontier Communications (FTR) deal. This proposed transaction is for the sale of wireline assets of Verizon in three states: California, Florida, and Texas. We learned about the kind of expansion this deal will bring to Frontier’s footprint.
Now we will look at why Verizon is selling these assets. According to the company, one of the reasons for shedding these assets is their location relative to Verizon’s other key wireline operations.
John Stratton, executive vice president and president of Verizon’s Global Enterprise and Consumer Wireline business, discussed this sale at the Bank of America Merrill Lynch 2015 Media, Communications and Entertainment Conference that was held on September 9, 2015. Stratton offered several insights about these properties to be sold to Frontier Communications: “So these are good properties.” He added, “For us, the issue here was geographic adjacency. So when we look at those markets, they were kind of islands unto themselves.”
He also mentioned, “They were nice businesses but there was still some meaningful investment to come in terms of a further upgrading of the copper plant for more fiber.”
According to Verizon, in 2014, the assets to be sold to Frontier Communications had revenue and adjusted-EBITDA (earnings before interest, tax, depreciation, and amortization) of ~$5.8 billion and ~$1.6 billion, respectively. Verizon’s wireline division’s revenue and EBITDA were ~$38.4 billion and ~$8.9 billion, respectively, during the year.
Instead of taking a direct exposure to Verizon’s stock, you may consider taking a diversified exposure to the company by investing in the SPDR S&P 500 ETF (SPY). Verizon made up ~1.1% of SPY as of August 31, 2015. SPY also held ~1.2% in AT&T (T) on the same date.
Alternatively, you may consider the SPDR Dow Jones Industrial Average ETF (DIA). DIA held ~1.9% in Verizon at the end of August.