AT&T/Frontier Wireline Deal in Connecticut Seen Unlikely to Signal Trend for Future

Frontier Communications’ $2 billion purchase of AT&T’s Connecticut wireline business is unlikely to mean major telcos are prepared to sell off similar statewide assets en masse, said industry experts in interviews. But they said telcos could consider similar deals in the future if it makes sense from a business perspective. Frontier said in December it’s buying AT&T’s wireline residential and business services in Connecticut, including that state’s portion of AT&T’s fiber network, as well as its U-verse video customers and some satellite-TV customers. The deal is expected to close in the second half of 2014 (CD Dec 18 p9).

Verizon Communications started the trend of spinning off statewide wireline assets in 2005, when it spun off its Hawaii wireline operations into Hawaiian Telcom, said Stifel Nicolaus analyst David Kaut. Verizon sold to FairPoint Communications its wireline assets in Maine, New Hampshire and Vermont in 2008. Verizon sold 4.8 million of its residential and small business landlines to Frontier in 2010. Frontier/AT&T Connecticut might “be the last sale of its kind, at least for the foreseeable future,” said MoffettNathanson analyst Craig Moffett. “It’s hard to imagine there are many more transactions like that left to be done.”

Verizon was able to make its own Frontier deal “in part because the lines in that deal represented such a small part of the states in question,” said Moffett of access lines. The states affected by the deal included Arizona, California, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin. Most of the landlines in that sale were rural exchanges that had previously been part of the GTE network that preceded Verizon’s formation. “It would be a very different proposition for Verizon to go to Massachusetts or the Pennsylvania Public Service Commission and try to persuade them to allow a sale to a less well-funded operator,” Moffett said.

"The rumbling had always been that AT&T was interested in selling off some of its rural assets, but the market was tougher after Verizon did its Frontier deal,” Kaut said. “AT&T’s also in a different situation than Verizon. They didn’t have the GTE network -- all their networks were Bell legacy networks. Verizon’s networks are kind of strewn all over the place because GTE was an amalgamation of all sorts of different systems around the country, so on some level it made more sense for Verizon before it made sense for AT&T.” Kaut said similar future deals are certainly a possibility, “but the question is, who would buy all that? Who can digest all that?"

An AT&T spokesman said the telco had agreed to sell its Connecticut wireline business to Frontier mainly because “AT&T’s business in the Northeast is increasingly wireless and advanced communications solutions for business customers while Frontier’s focus is on operating incumbent local exchange companies in markets like Connecticut.” AT&T plans to use the proceeds from the sale to fund its Project Velocity IP plan to “transform our operations to an all-IP, wireless and cloud network,” the spokesman said. CenturyLink, Frontier and Verizon didn’t comment.

If it makes strategic sense for a telco to divest what it sees as non-core assets, “then it makes sense,” said Jason Nicolay, vice president at broker Media Venture Partners. “I don’t see the telcos going out and strategically saying ‘let’s go divest our fiber routes, our landline enterprise subscribers.’ Although they love the wireless business, everything wireless must go through some sort of wireline connection, whether it’s fiber or a copper line or what have you. The wireless piece is only from the tower to the device. You have to have access to a robust wireline network to be able to ensure quality service."

Major telcos aren’t likely to make any large wireline acquisitions, either, “unless it’s strategic to what they're doing or that would complement existing landline operations,” Nicolay said. “The wireline business is largely driven from a financial perspective and making sure it’s not a declining asset in terms of being able to continue to produce a profit. I just don’t anticipate a huge wave of telcos saying they're getting rid of their wireline business.” Nicolay noted that when Verizon said in September it agreed to buy Vodafone’s 45 percent ownership stake in Verizon Wireless (CD Bulletin Sept 2 p1), Verizon said it would help to “streamline their process and their organization for wireless and wireline. That’s important, that they're combining together strategic assets in areas where they can work strategically together.”