Frontier's (Nasdaq: FTR) move to acquire AT&T's regional Connecticut operations, once known as Southern New England Telephone (SNET), for $2 billion immediately deepens the telco's presence in the Northeast part of the United States. When it completes the acquisition, Connecticut, New York, and Pennsylvania will become part of its new Northeast region.
This is the first large acquisition Frontier has made since completing its purchase of Verizon's (NYSE: VZ) rural lines for $8.6 billion in 2010. While many industry watchers are concerned about its risk, there are a number of differences that make this one easier to swallow.
For one, the acquisition covers only one state. When it acquired the Verizon assets, which tripled Frontier's size, the telco faced two challenges: integrating multiple billing systems and upgrading network infrastructure that had been largely abandoned.
Also, AT&T (NYSE: T) has been making investments in the state's network infrastructure. Between 2010 and 2012, the telco spent $750 million to extend broadband to 96 percent of its households. AT&T has also enabled 42 percent of the state's households with its growing U-verse voice, broadband and video services.
"We are acquiring a well-built and well-maintained network," said Maggie Wilderotter, CEO and president of Frontier, during the conference call announcing the acquisition. "This is not a fixer upper like previous acquisitions we have done. AT&T has invested substantial capital over the years providing us with a leading-edge technology platform to build upon."
Another positive aspect of the AT&T assets is their location.
Frontier and its various predecessors have been operating in the state for nearly 70 years and the AT&T network is close to their operations in New York and Pennsylvania, meaning they can deploy local resources to respond to network issues. They also have well-established existing relationships with local and state government officials.
Besides location, it will be able to apply its local targeted approach to selling consumer and business services. Frontier has established general managers for each of its regions, including the Northeast region, who can make decisions closer to the customer.
On the consumer front, it will gain access to AT&T's existing U-verse TV and broadband, which operates over a fiber to the node (FTTN) architecture similar to what Frontier uses in its own market.
Stopping short of any specific plans, Wilderotter indicated Frontier could implement U-verse service outside of Connecticut. Such an idea is not that far-fetched. In 2012, a rumor emerged that Frontier would license AT&T's U-verse technology, yet nothing formal has ever been launched.
"We will have substantial opportunity to expand our product set into Connecticut and to drive market share of broadband and U-verse services," said Wilderotter. "U-verse has strong momentum today and we will have the option of utilizing this platform in other Frontier markets."
However compelling a possible U-verse expansion could be, a key concern is whether the telco will drive customers off U-verse to satellite, as Frontier has done in the few markets where it currently offers FiOS.
This acquisition will also be another platform to grow the business customer base. Frontier will be able to leverage an existing fiber network that serves 1,100 business locations out of 40 on-net buildings connected to its fiber network.
Perhaps the bigger picture here is that it could kick off a potential broader Northeast expansion strategy where it could pursue the acquisition of other fiber rich CLECs and ILECs like FairPoint Communications (Nasdaq: FRP). It will be interesting to see what Frontier's next move will be to scale its business.--Sean