Thursday, May 14, 2009

Frontier Gains Immediate Broadband Stimulus Advantage with Verizon Rural Acquisitions 05/14/09 A day after announcing its $5.25 billion acquisition of the remaining rural landline business of Verizon (NYSE: VZ), Frontier Communications (NYSE: FTR) is reporting that it will pursue broadband stimulus funds from the federal Recovery Act.

"We are absolutely planning on applying for funds, once the federal rules are in place," said Frontier spokesperson Steven Crosby in a telephone interview with of today.

The business and telecom press has been awash with detailed stories reporting on the Verizon - Frontier announcement of yesterday, stating that Frontier is acquiring all of Verizon's remaining rural landlines in 14 states. Not mentioned to date is the competitive advantage, under current federal rural telecom funding regulations, the deal delivers to Frontier as it applies for "broadband stimulus" grants or loans going forward.

The federal Recovery Act appropriated a total of $7.2 billion in broadband stimulus monies to be administered by 2 federal agencies. The Act, formally called the American Recovery and Reinvestment Act of 2009 (ARRA), was singed into law by president Obama on February 17.

Frontier's Rural Focus
A story published yesterday on the deal quotes Frontier Chairman and CEO Maggie Wilderotter stating that the acquisition makes her company "the largest rural pure play in the United States."

In Frontier's press release on the deal, Wilderotter states,"With more than 7 million access lines in 27 states, we will be the largest pure rural communications provider of voice, broadband and video services in the U.S. Frontier is committed to providing our customers with state-of-the-art technology and innovative products."

Perhaps responding to the pitched rhetoric from fights over the merits of broadband around the nation, the Frontier executive also said, "We know that broadband is a catalyst for a healthy local economy and job growth.”

It is in this context -- an agile player in the rural telecom market -- that we see the statement of today made to by Frontier spokesman Steven Crosby.

Present Federal Rural Telecom Rules of USDA-RUS
For much of the American telecom industry, rural telecom and the federal programs that subsidize it is a world unto itself which remains arcane if not unfathomable. An understanding of those rules however demonstrates the clear advantages that Frontier has gained in the highly competitive arena defined by both broadband stimulus funds under ARRA, and by existing programs.

Current rules of the Rural Utilities Service (RUS) division of the US Department of Agriculture (USDA) state that once a rural telecom carrier receives grants or loans for network construction or expansion in a designated area, no additional grants or loans may be issued to any other communications company for that same rural area.

As our colleague, Liz Zucco, CEO of rural telecom consulting firm MarketSys USA in Georgia tells us, "No one else can become a borrower of, or receive a grant from, RUS once a grant or loan is issued for a given rural service footprint."

Simultaneously, RUS specifically has rules for the "nonduplication" of "existing" carrier facilities and services as applicants apply for new grants and loans. Agency regulations also give a competitive advantage to existing carriers operating adjacent to unserved areas, as they plan to expand facilities and services into those regions lacking broadband.

RUS at the Department of Agriculture, and the National Telecommunications and Information Administration (NTIA) at the Commerce Department are the 2 agencies designated by ARRA for the dispersal of funds from the Act. Both agencies have had regulations in place for years as they have distributed funds under the Technology Opportunities Program (NTIA) and the telecommunications sections of the Rural Development divisions of RUS. The broadband stimulus regulation drafting process now going on at both agencies will follow existing rules in place where they exist.

A Game Changer in 14 States
The Frontier acquisition of new operating territories in the 14 states is thus a potential game changer for communities in and adjacent to those areas that are today "unserved" by broadband facilities. This is particularly true given the fact that Verizon executives have repeated the carrier's displeasure with the open access strictures of ARRA, leading most of us in the community of 'broadband stim' observers to conclude that the firm will not apply for federal funds.

According to data released by Frontier yesterday, via its investor relations site, the carrier will acquire all current Verizon landline operations in
Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin, and some border areas of California.

Business Case for the Deal
In its continuing effort to shed rural customers, Verizon
Communications Inc. (NYSE: VZ) yesterday announced it is divesting itself of its rural landlines in 14 states, and transferring that installed base to Frontier Communications Corp. (NYSE: FTR). The transitional company comprised of former Verizon assets within Frontier will be called SpinCo as the integration process move forward. Frontier will credit Verizon with an estimated $5.25 billion in Frontier stock for the transaction, and pay to Verizon an additional $3.3 billion in cash raised via a debt offering at a later date.

The story by Roger Cheng of Dow Jones Newswires on the deal calls it a Reverse Morris Trust which results in tax free consequences for Verizon.

Frontier executives yesterday stated repeatedly that the carrier will achieve positive economies of scale as it expands into the new operating territories. In an obvious reference to the operational woes of Fairpoint Communications, Inc. (NYSE: FRP) as it acquired the former Verizon holdings in rural Northern New England, Frontier stressed that it faces an easy migration path for SpinCo's supporting systems. Frontier's IR site makes the point that "13 states run on a separate billing platform that comes with SpinCo in the acquisition; Only one state, representing 13% of SpinCo access lines, (are) required to be converted by closing."

As best documented in the Fairpoint Watch site of the Nashua Telegraph (NH), the North Carolina based rural telco has had a nearly disastrous time transferring former Verizon customers in Maine, New Hampshire, and Vermont onto its own operational support systems (OSS) from multiple legacy systems.

Our Take: If Frontier can indeed avoid the operational nightmare that has become the Fairpoint franchise in New England, the carrier will achieve a competitive advantage for broadband stimulus funds, and for associated rural telecom federal subsidies, going forward.

State broadband program directors, community broadband advocates, and in-region carriers from the 14 states about to be part of the new SpinCo entity are well advised to reach out to Frontier.
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