Verizon sells phone lines to Frontier for $5.25 billion

NEW YORK (Reuters) - VERIZON (VZ.NY)Communications Inc will sell 4.8 million rural phone lines to Frontier Communications Inc for $5.25 billion in stock, getting rid of the declining business to focus on wireless and broadband services.

The deal will triple the size of Frontier, making it the largest rural-only service provider in the United States. Frontier, whose shares fell slightly, said the deal will boost earnings and provide $500 million in annual savings.

The deal comes amid a wave of consolidation in the rural phone market, as providers seek to cut costs as more consumers cancel landlines. Last year, CenturyTel Inc announced a deal to buy Embarq Corp for $5.8 billion in stock.

Frontier Chief Executive Maggie Wilderotter told Reuters she would expand high-speed Internet services, now only in 60 percent of the lines being bought.

"These markets have a lot of upside opportunity from a revenue perspective," Wilderotter said in an interview. "One of the things we're going to be very focused on is bringing broadband to rural America in these 14 states."

Frontier said it needs to cut its per-share dividend to 75 cents a year, from $1, after the deal. On the plus side, the deal reduces its debt-to-equity ratio to 2.6 from 3.8.

This is the latest of several deals where Verizon has shed traditional home phone lines in markets it views as less strategic to focus on more-lucrative wireless customers and nascent video services that compete with cable companies.

"Shareholders see this transaction boosting Verizon's growth rate because it lowers the exposure to declining legacy phone assets while increasing exposure to wireless, video and the enterprise segment," said UBS analyst John Hodulik.

One person familiar with the situation said that Verizon was unlikely to sell any more rural lines after the Frontier deal as it has already sold properties in Hawaii and New England.

Wilderotter said the deal means that Frontier will be offering Verizon's FiOS video service in four states.

She said Frontier, which provides video services in a partnership with DISH Network Corp in its current markets, would see how FiOS works before deciding if it would expand that service into other markets.

"We believe the penetration of a triple play for voice video and data will be a huge upside as well," she said.

Frontier said the deal would add to free cash flow in the second full year of operation, increasing free cash flow in a double-digit percentage range in the third year and beyond.

Stifel Nicolaus analyst Chris King said he thought it was a good acquisition for Frontier, but noted, "They'll have to get past the initial reaction that anyone who buys assets from Verizon is a fool."

King cited the recent bankruptcy filings of Idearc , Verizon's spin-off of its phone book business and Hawaiian Telecom, which it sold to private equity investors. He also noted that Fairpoint Communications Inc , another buyer of Verizon assets, was trading at little over a dollar.

But King said the deleveraging and the savings promised by the latest deal made it attractive to Frontier shareholders.

With more than 7 million access lines in 27 states, Frontier would become the largest pure U.S. rural provider of voice, broadband and video services. Other rural providers include Windstream Corp .

By combining the assets, Frontier said it would have had 2008 revenue of $6.5 billion and $3.1 billion earnings before interest, tax, depreciation and amortization.

Under the deal, Verizon will create a separate company for the assets being sold. That company will simultaneously be spun off to Verizon shareholders and merged with Frontier.

Verizon shareholders will own between 66 percent and 71 percent of the new company after the deal closes, while Frontier shareholders will own between 29 percent and 34 percent. The deal is expected to close within 12 months.

Frontier will assume $3.3 billion of debt as part of the deal, but Wilderotter said the reduced debt to equity ratio from the deal would help the company's financial flexibility.

The exact number of shares to be issued will be determined by Frontier's average 30-day share price before the close, but the per-share price will be collared between $7 and $8.50.

Frontier shares were down 3 cents at $7.54 on the New York Stock Exchange, where Verizon shares were flat at $30.40. Verizon shareholders will receive one share of Frontier stock for roughly 4.2 shares of Verizon stock held as of the record date.

Frontier will acquire Verizon's wireline business in 14 states, increasing the number of access lines in its portfolio to 7 million and about 11,000 Verizon employees will move to Frontier as part of the transaction.

Citigroup Inc and Evercore Partners acted as financial advisers to Frontier. Barclays Cap and JPMorgan Securities advised Verizon. Cravath, Swaine & Moore LLP acted as legal adviser to Frontier.

(Reporting by Anupreeta Das, Sinead Carew and Jessica Hall;

Editing by John Wallace, Dave Zimmerman)