Frontier Communications Corporation (NASDAQ: FTR) announced on Wednesday, February 4^th that it had agreed to acquire wireline operations in California, Florida, and Texas that belong to Verizon Communications Inc. (NYSE: VZ).  The transaction is for approximately $10.54 billion and should benefit Frontier as it continues to create scale through M&A.

Valuation Analysis and Deal Metrics

Transaction Facts

• The transaction is being financed through $10.54 billion in cash.
• The acquisition includes Verizon’s wireline voice, broadband and video operations.
• Expected to close by the first half of 2016.

 Strategic Considerations

• Transaction will allow Frontier to double in size.
• Frontier expands its footprint, primarily in areas where it did not have a significant presence.
• Frontier’s experience with its newly acquired U-verse properties should benefit the integration of its FiOS markets. 
• 54% of the acquired network is FiOS enabled, repositioning Frontier’s business mix more heavily to fiber-based services.
• The acquired wireline operations generated revenue of approximately $5.7 billion for Verizon in 2014.
• Frontier’s lower cost structure is expected to reduce costs by $525 million in the first year after the close and by $700 million by year three post-close.

 JSICA’s Take

• A comparison of the multiples of priced transactions since the beginning of 2012, shows Frontier paid relatively lower multiples in the deal.
• Since the beginning of 2012, the average EV/LTM Revenue on priced transactions was approximately 1.9x, which is 0.1x higher than the FTR-VZ transaction multiple.
• Since the beginning of 2012, the average EV/LTM OIBDA was 6.0x, which is 1.5x higher than the multiple in the transaction.
• The average EV/P_ OIBDA since the beginning of 2012 was approximately 4.7x, which is 1.2x higher than the FTR-VZ transaction multiple.