Frontier's "Folly" Finally Finalized
Back in the summer of 2010, Frontier Communications (NAS: FTR) made what some considered a sucker purchase. The company paid $8.6 billion for 14 states' worth of wireline infrastructure from the king of jettisoning unwanted resources, Verizon (NYS: VZ) . For a glimpse into the future, Frontier should have paid closer attention to the load of debt problems that FairPoint Communications got itself into when it bought its "fixer-upper" properties from Verizon. But the chance to triple in size was too much for Frontier to resist.
And it may work out after all, according to Frontier. The company released a statement saying that the conversion of all the systems associated with the former Verizon properties -- operating, financial, and human resources -- to Frontier's own legacy systems has been completed nine months ahead of the original schedule.
"The conversion ... reduces cost and complexity, improves the customer experience and facilitates the rollout of new products and services," said the statement.
For a time, though, it seemed that Frontier had bitten off more than it could chew. There was a problem in working with the FiOS customer base it inherited. The cost of acquiring content for that network was too high, according to Frontier, and so it -- in a move that seems counterproductive for customer growth -- sent FiOS installation charges through the roof in Indiana, Oregon, and Washington.
In addition, many of the resources Verizon sold to Frontier had not been properly maintained by the giant telecom; Verizon just had not made the necessary investments to keep its systems working properly. Needless to say, the result was a hemorrhaging of customers, a drop of 11.4% in phone lines served the year before the sale to Frontier. Those losses continued under Frontier's ownership, but to a lesser extent. There was a 9.6% drop in phone customers in the former Verizon regions during 2011.
Frontier's fortunes have not fared well since that deal went down. An investment of approximately $13,500 in shares of Frontier would have initially risen to almost $19,000 by the end of 2010 before falling to its present value of about $9,500 today. And that's from total returns, factoring in Frontier's former very generous dividend, which averaged 12.7% over the last 13 quarters. The mean total return for the telecom services industry during that time frame rose approximately 20%, while Frontier's fell nearly 30%.
It also didn't help that after a disappointing last quarter, Frontier did something anathema to income investors: It cut its dividend almost in half. Perhaps now, with the conversion of the former Verizon properties finally completed, the telecom can get back in the business of making dividend investors smile.
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At the time this article was published Fool contributorDan Radovskyowns shares of Frontier Communications. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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