Verizon Sells Rural Access Lines to Frontier for $8.6B

[qi:086] What a deal! Verizon Communications (s VZ) today unveiled plans to dump roughly 14 percent of its expensive copper lines in exchange for $8.6 billion from Frontier Communications (s FTR). The transaction, which is expected to close within the next year, will make Frontier the nation’s fifth-largest incumbent local exchange carrier with more than 7 million access lines, 8.6 million voice and broadband connections and 16,000 employees in 27 states.

The big winner here is Verizon, which has been trying to sell off its rural access lines for years. It sold 1.5 million of them to Fairpoint in 2007, which is now struggling under the burden. In 2004, Verizon sold its access lines in Hawaii to The Carlyle Group. The resulting Carlyle-created business, Hawaiian Telecom, filed for bankruptcy last year.  Buying copper land lines is proving to be a sucker’s game.

As more consumers drop landlines, they’re becoming more expensive to service and as such a bigger drain on some carriers’ bottom lines. This is leading to consolidation among rural carriers as they seek scale in order to compete, such as Windstream’s announcement earlier this week that it will buy D&E for $159 million, and last year’s purchase of Embarq by CenturyTel. It’s likely the folks behind these deals are hoping to win a chunk of the $7.2 billion in funds allocated to broadband access as part of the stimulus package, but the question is, can Frontier milk these lines for all they’re worth before they start draining the company’s profits?

Verizon isn’t getting out of the copper business just yet. Customers of its FiOS, fiber-to-the-home lines still get their voice service over the circuit-switched network, so Verizon will still have more than 30 million access lines in areas where it also has high concentrations of its FiOS. This transaction is all about reducing expenses associated with maintaining copper lines in an area where Verizon can’t economically deploy fiber, and expect growth.

Verizon CEO Ivan Seidenberg said in a company statement: “Longer term, this transaction is part of our multiyear effort to transform our growth profile and asset base to focus on wireless, FiOS fiber-optic services and other broadband development, and global IP…We believe our focus on reshaping our asset base will drive higher growth over time and improve long-term returns.”

Frontier will get the residential and small business customers currently subscribing to both voice and DSL service. It also will take on 11,000 Verizon employees in the 14 states. Those states are: Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin. The agreement also includes a small number of Verizon’s exchanges in California, including those bordering Arizona, Nevada and Oregon.

Verizon will spin out its acquired assets into a new company that will be immediately merged into Frontier. Verizon shareholders will receive approximately $5.25 billion of Frontier common stock in the merger, and Verizon will receive a combination of cash or debt relief of some $3.3 billion.