Frontier Communications is less than a month out from completing its acquisition of Verizon's (NYSE: VZ) properties in three states, but Citigroup has downgraded the telco's rating, saying that its synergies might not meet forecast estimates.
Michael Rollins, a Citigroup analyst, lowered his Frontier rating on Wednesday from neutral to sell, according to an Investors Business Daily report.
"We are lowering our pro-forma OIBDA (operating income before interest tax, depreciation and amortization) outlook for Frontier," said Rollins in a research report. "Our study of the company's last two acquisitions suggests net synergy realization is much lower than the guided gross synergy figures. We do not think the emerging consensus is discounting the guided synergy contributions enough."
For its part, Frontier maintains it is confident that this previous experience of integrating large networks will make its latest deal a success.
The service provider has already put in place elements to ensure that it can make a successful flash cut of Verizon's systems to its own upon close, and it will implement Verizon's pricing plans to reduce customer confusion.
Unlike its challenging transition into AT&T's (NYSE: T) Connecticut footprint in 2015, Frontier said during its fourth quarter 2015 earnings call that its "day one" synergy for the three territories will be around $600 million.
Dan McCarthy, CEO of Frontier, told investors the telco is applying lessons learned from the Connecticut cutover to its planned transition into California, Florida and Texas.
Besides the potential synergies, the service provider said that it also sees and opportunity to increase market share for existing copper and small business customers that may have churned over to cable operators in the three new states.
Upon completing its acquisition of the Verizon assets in California, Florida and Texas, Frontier would take on $600 million in debt.
This is the third large acquisition Frontier has made of other ILEC wireline assets in recent years.
Previously, the service provider purchased Verizon's wireline network facilities in 14 states for $5.3 billion in 2010. Later in 2013, it bought AT&T's Connecticut wireline assets for $2 billion.
- Investor's Business Daily has this article
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