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Analysts deem Frontier's asset sales as temporary fix to long-term problem

Frontier Communications Corp.'s deal to sell its assets in four Western states will alleviate some of the telecom player's near-term financial woes, but does nothing to address ongoing concerns around the sustainability of its business model, analysts said.

Shares in Frontier soared by as much as 25% after the company on May 29 announced it would be selling its assets in Washington, Oregon, Idaho and Montana for $1.35 billion in cash to private investment firm WaveDivision Capital LLC, in partnership with Searchlight Capital Partners LP. Frontier touted the agreement as one that would reduce its debt and strengthen liquidity two issues that have long plagued the company.

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Fitch Ratings Senior Director John Culver wrote in a May 30 report that Frontier's asset sale "provides a buffer" to uncertainties around the company's ability to access the debt market in the future at reasonable economic terms. But beyond asset sales, it will be key for Frontier to shore up its existing financial position to pave the way for more sustained future growth, he said.

"If [Frontier] can stabilize and grow its EBITDA, that's a key thing to have the opportunity in the future to tackle some of these [debt maturities] with something other than asset sales," Culver said in an interview.

CFRA analyst Keith Snyder in a May 29 research note maintained his "sell" rating on Frontier stock, noting the recent asset sales do not solve the company's long-term debt struggles and could even weaken its portfolio.

"We see these asset sales as an act of desperation, which will help [Frontier] in the short run, but will harm it long term as it cuts its revenue base, further limiting its ability to reduce outstanding debt," Snyder wrote.

Frontier in February of 2018 suspended its regular quarterly dividend to accelerate debt reduction. The company ended 2018 with $17.40 billion in total debt, down slightly from $17.86 billion in the previous year.

Snyder noted Frontier will still have roughly $15.5 billion in long-term debt after the sale of its northwestern assets to WDC.

Similarly, S&P Global Ratings analyst Ryan Gilmore said the deal provides Frontier with a "modest credit lift," but its mounting debt remains a growing problem.

"Frontier still has limited avenues to address the $2.7 billion of unsecured debt that matures in 2022 due to its lack of secured debt capacity, low free operating cash flow (FOCF) and limited access to the capital markets," the analyst wrote in a May 30 note.

The company's interim CFO Sheldon Bruha said on an earnings call in April that the company remains committed to paying down its debt "through a combination of debt paydowns through free cash flow, EBITDA growth, particularly as well from our transformation initiatives, potential asset sales and ultimately, capital markets transactions."

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Raymond James analyst Frank Louthan held a slightly more positive view of the deal overall, saying Frontier's agreement with WDC could be a good fit. WDC is headquartered in Washington state and led by Steve Weed, founder of Wave Broadband, which grew to one of the largest broadband companies on the West Coast until its sale in 2018 to TPG Capital Management LP.

"The fact that the buyer is a proven operator with experience in these markets is a significant factor in the sale and should help the regulatory approval process as well," Louthan wrote in a May 29 research note.

Louthan noted that wireless peer CenturyLink Inc. has also expressed interest in exploring similar divestitures. CenturyLink CEO Jeffrey Storey said on an earnings call in May that the company was evaluating the future sale of assets such as its consumer business, but added that the company was merely "early in the process" of the strategic review.

"We believe there could be other asset sales in the industry," Louthan wrote.

Frontier's deal with WDC, which is expected to close within one year, involves properties in four states that serve over 350,000 residential and commercial customers and a network that passes 1.7 million households and businesses. For the 12 months ended in March, the targeted operations brought in $619 million of revenue, along with $46 million of net income and $272 million in adjusted EBITDA.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this article can be found here.