Bulletin: Verizon Communications Inc. Has Enough Financial Capacity To Absorb The Proposed Frontier Communications Acquisition
This report does not constitute a rating action.
NEW YORK (S&P Global Ratings) Sept. 5, 2024--S&P Global Ratings said today that Verizon Communications Inc.'s (BBB+/Stable/A-2) proposed acquisition of Frontier Communications Holdings LLC in an all-cash transaction valued at $20 billion, including a $9.8 billion equity purchase price and $11.8 billion of debt, can be absorbed by its current financial flexibility. We expect Verizon's adjusted leverage will increase modestly but credit metrics will remain supportive of the current rating and outlook. The transaction is expected to close in early 2026.
We expect leverage to increase and cash flow metrics to weaken modestly but remain supportive of the rating. Our current base case forecast assumes that S&P Global Ratings' adjusted debt to EBITDA will be around 3x by the end of 2024, improving to 2.8x in 2025, and 2.7x in 2026. Assuming the acquisition closes in 2026, we would expect adjusted leverage to rise to around 3.0x (about 0.3x higher), but still below our downgrade threshold of 3.25x. Additionally, Verizon's post dividend free operating cash flow (FOCF) to debt will decline to about 5.8% in 2026 compared with 9.4% under our previous forecast due to the higher levels of capital expenditures from Frontier's fiber to the home (FTTH) build.
Still, Verizon has some levers it can pull to limit the impact on credit metrics. News media reports suggest the company may look to sell its remaining portfolio of towers for cash proceeds, although its impact on leverage would be muted by a sale lease back transaction since we include operating and finance lease obligations as debt. Additionally, Verizon planned to start a share repurchase program once it hit 2.25x net unsecured debt to EBITDA, which we forecasted occurring in 2025. With the Frontier acquisition, we do not expect Verizon to achieve this metric until 2027, which frees up cash flow that would have gone to stock buybacks for the next two years.
Synergies are achievable based on precedent transactions but offset by integration expenses. Verizon's annual target synergies of $500 million by 2028 represents about 12% of Frontier's cash operating expenses, which is achievable in our view, and there is probably upside to this number based on previous wireline transactions. Cost synergies will primarily consist of headcount reductions, back office and support operation savings, network integration, reduced transport expense, and fiber procurement. Still, synergy realization will also be offset by substantial costs to achieve these savings and will require solid execution during the integration, which will be challenging and likely take several years.
The proposed acquisition offers more bundling opportunities, but Verizon's fiber coverage is still limited, which increases the likelihood of future mergers and acquisitions or higher capital expenditures. Verizon currently passes about 18 million homes with fiber and the acquisition of Frontier will add another 10 million fiber passings by 2026, which will closely approximate the 30 million passings that AT&T will cover.
The transaction will enable Verizon to bundle in home broadband and mobile services to a wider footprint to better compete with the incumbent cable providers, which we expect will take almost half of the post-paid phone net subscriber additions in 2024. Bundling high-speed data should improve churn in these service areas in an increasingly competitive marketplace. However, Frontier's fiber footprint only covers about 5% of U.S. households, limiting the overall bundling opportunity and we believe Verizon will need greater wireline scale longer-term, increasing the risk of more wireline transactions or higher capex to expand its fiber footprint.
| Primary Credit Analyst: | Allyn Arden, CFA, New York + 1 (212) 438 7832; allyn.arden@spglobal.com |
| Secondary Contact: | Chris Mooney, CFA, New York + 1 (212) 438 4240; chris.mooney@spglobal.com |
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