Frontier’s possible CTF asset sale could attract fiber providers, private equity, says analyst

If the rumors raised by a Bloomberg report turn out to be true that Frontier is going to sell its California, Texas and Florida (CTF) assets, analysts say that it could attract a mix of network infrastructure providers and private equity firms that are seeing the value in fiber assets. 

Frontier Communications, according to Bloomberg, is working with advisers to sell off its CTF assets that it purchased from Verizon in 2016.

An unnamed source close to the company said that the CTF assets could be sold in parts versus just one unit.

RELATED: Frontier acquires Verizon wireline assets in 3 states for $10.5B

News of this potential sale comes as Frontier is currently struggling to pay off $18 billion of debt, and recently won a reprieve from its lenders that will allow it to borrow more money and refinance part of its debt.

Frontier did not respond to FierceTelecom's request for comment.

In January, Frontier amended its credit agreements with JPMorgan Chase Bank, N.A., and CoBank ACB.

Cowen Equity Research said in a research note that such a sale could reflect the growing interest and value private equity and other infrastructure providers see in purchasing fiber assets to support business services and necessary backhaul for upcoming 5G wireless deployments.

“The level of capital flowing into Communications Infrastructure appears to be increasing, driven in large part by infrastructure/real-estate funds that are now focusing on the industry,” Cowen said. “The PE, infrastructure, and real estate players are not only providing a capital injection into this asset class, but can take on more leverage (securitizing the asset), driving higher returns for themselves, and in turn are willing to pay higher multiples.”

Cowen Equity Research added that Frontier, if the reports ring true, could reveal its reasoning during its fourth quarter earnings call.

“All in, we sense this opportunity to explore a sale could be born out of both a cautionary concern over financials as well as a “testing the valuation waters” in a 5G new-money era; we note that Frontier’s February 27 earnings (and subsequent 2018 guidance) could be a telling sign as to which scenario dominated the decision,” Cowen said.  

Private equity, Uniti could be possible buyers

So, who would be interested in making a run for Frontier’s CTF assets? Some of the possible interested parties in Frontier’s assets could be private equity firms or possibly Uniti, which operates as a Real Estate Investment Trust (REIT).

A private equity firm buying the assets is not a far-fetched idea. Several private equity firms in recent years have purchased regional competitive providers and even ILEC assets.

Fellow regional telco Lumos was purchased by EQT, a firm that has sizable telecom holdings in the United States and in Europe. After the sale, Lumos ended fiber network spinout plans with an eye toward expanding its existing fiber business.

Meanwhile, regional fiber provider FirstLight, which is owned by Oak Hill Capital Partners, has become an active consolidator of the Northeast regional fiber provider market, purchasing FLTG, Oxford NetworksSovernet Communications, BayRing Communications, ION Communications and 186 Communications.

“The Frontier assets may best be in the hands of a private company as the value creation could be scrutinized by investors with a longer-term time horizon. We saw a similar dynamic play out with PE firm EQT’s purchase of Lumos,” Cowen Equity Research said.

Another possibility is that Frontier could engage in a sale leaseback transaction with Uniti, but Cowen said such a deal would be challenging for the residential last mile portion.

“Uniti would be an ideal candidate for an SLB transaction, with obvious benefits for Frontier meanwhile providing Uniti with instant revenue diversification away from Windstream and an immediate boost to AFFO,” Cowen Equity Research said. “However the timing is very poor; investors would likely prefer Uniti shy away from another consumer broadband asset at this time, and instead focus on more fiber M&A (FirstLight could be an option).”

Fueling 5G, cloud deployments

Wholesale and retail fiber provider that provide dark and lit fiber could see the Frontier assets to satisfy a mix of business service and backhaul needs for upcoming 5G wireless deployments.

While residential fiber assets were not seen as valuable as metro and long-haul rings, the emergence of 5G wireless could make residential fiber more valuable. This is because 5G wireless will require a large small cell build-out, and Cowen estimates 80% of the cost of a small cell solution is the fiber connectivity.

Verizon, for one, has hatched an aggressive 5G fixed deployment plan for five cities this year.

To support the much-needed backhaul facilities for its 5G deployments, the service provider has been aggressively building out a fiber arsenal via targeted acquisitions like XO Communications and parts of WOW!’s Chicago assets.

“Verizon is leading the way with a fixed wireless residential 5G deployment and a compelling threat against cable, with a plan to launch five cities in 2018,” Cowen Equity Research said. “With the growth in 5G and bandwidth demand in general (cloud, enterprise, media), Frontier’s CTF fiber could play a more valuable role (in a multi-use fiber world) as infra providers can use it to run capillary offshoots to unique endpoints, including aforementioned 5G residential nodes that tap multiple HHPs.”

Cowen Equity Research added that fiber assets overall will be a key asset as ILECs transform their CO into data centers.

“We could see more value (than previously contemplated) with the regional central office fiber as ILEC CO’s are being converted to edge data centers, thereby enhancing the value of fiber connected to these endpoints,” Cowen Equity Research said. “Lastly, we’d point out that valuation of fiber assets are enjoying multiple expansion with a 'changing of the guard' of new investors.”