Frontier Communications is set to emerge from Chapter 11 bankruptcy on Friday and return to public stock markets next week. The company has less debt, a new executive team, and a strategy focused on converting its slow and aging copper-based telecom network to a next-generation network built on fiber optic cable. That’s a path that cable giants like Charter Communications and Altice USA have delivered on over the past decade, with shareholders reaping the rewards.
But Frontier is still undoubtedly a fixer-upper, and management’s ability to execute on their targets will be the key to its future success or renewed failure. The new team hosted an event on Friday morning to discuss their future plans and release first-quarter results.
The stock will start trading on the Nasdaq exchange on Tuesday May 4, under the ticker “FYBR.” Frontier has a footprint in 25 U.S. states, including close to 12 million homes and businesses it reaches via a copper cable and 3.4 million by fiber. Copper-based internet service—often referred to as DSL—is not a competitive product in most markets, with speeds tending to max out at a couple of megabytes per second. That’s a fraction of the connection speeds users can get from cable or fiber lines, or even from their wireless phone data plans.
Needless to say, Frontier had been shedding customers and facing plummeting sales of its copper-based services in recent years, with its much smaller fiber business underperforming peers. Burdened by a hefty debt load from successive acquisitions and burning cash, Frontier filed for bankruptcy protection in April 2020. The restructuring process wiped out equity holders, but allowed the company to eliminate some $11 billion in debt and emerge with a clean slate.
It now has a new team at the top, including former Vodafone UK CEO Nick Jeffery as CEO, former Verizon Communications (VZ) president of global operations John Stratton as Executive Chairman, and former AT&T (T) senior vice president of construction and engineering Veronica Bloodworth as Chief Network Officer.
Going forward, Frontier’s new management is planning to overhaul the company’s network and replace copper lines with fiber in the coming years. Jeffery estimates that it will have a 20% cost advantage when laying fiber over new entrants given its existing copper network—the utility poles are already standing, the long-haul network already exists, and cable conduits are already installed.
About 87% of Frontier’s copper customers are in areas with one or zero other home-internet competitors, making them attractive for Frontier to come in with a superior product and capture a large share of the market. The company’s current fiber footprint has a penetration rate of 41.5%, with management targeting 50% over time.
Frontier plans to add about 500,000 fiber locations in 2021, and Jeffery says he expects that pace to accelerate meaningfully in the future. That 2021 build is going to be financed with cash on hand and its revolving credit facility, which will be about $1.3 billion combined at emergence.
Frontier’s leverage will be about 2.2 times net debt to adjusted earnings before interest, taxes, depreciation, and amortization initially, with plenty of room to increase that to fund a faster fiber build in the future. Telecom companies have a lot of real assets that investors are comfortable lending against—Charter’s (CHTR) net leverage is roughly 4.5 times and Altice’s (ATUS) is over 6 times, while data-center and cell-tower REITS are comfortable with net leverage in the 5-times range as well.
Frontier management has identified an initial expansion block of 3.4 million locations to upgrade to fiber, which it estimates it can do at internal rates of return of 24% to 30%. That’s a no-brainer upgrade that should be easy to secure financing for. The next block of 6.7 million locations will deliver IRRs of 14% to 20%, per management’s estimates, which would bring Frontier to a total fiber network serving about 13.3 million locations.
The leaner, meaner, and more focused new Frontier has a good plan and is operating in attractive markets with high growth potential and barriers to entry. If management can deliver on the company’s turnaround, shareholders will benefit. Charter emerged from bankruptcy in 2009 at $35 a share, and after a decade of small and large acquisitions and an aggressive push to upgrade its cable footprint, the stock is worth more than $670 today.
“We’re really all about execution,” Jeffery tells Barron’s. “We’re going to put the customer right at the center of everything we do, we’re going to execute on our fiber build plans, we’re going to execute on our customer propositions, we’re going execute on becoming more efficient. And if we can do all of those things, I really think Frontier is well placed to be one of the great American turnarounds, and certainly that’s our ambition for the business.”
Frontier’s 2020 revenue of $6.9 billion produced adjusted Ebitda of $2.8 billion—of which about $1 billion can be attributed to Frontier’s fiber business, $1.4 billion to copper, and $400 million to subsidies and credits tied to government programs such as the Connect America Fund II. Fiber assets should trade for about 12.5 times enterprise value to Ebitda, versus about 5 times for copper assets, according to New Street analyst Jonathan Chaplin—implying an enterprise value of close to $20 billion for Frontier today.
After about $6 billion in net debt, that leaves an equity value of roughly $14 billion. Frontier will have 260 million fully diluted shares outstanding when it begins trading, suggesting a per-share value of about $53 using Chaplin’s valuation multiples for Frontier’s current portfolio. His base case price target—which assumes that Frontier can upgrade fiber faster than currently suggested—is $111 a share.
Increasing fiber locations, higher penetration of Frontier’s existing footprint, and potential gains in average revenue per user all present opportunities for upside to that price. But that’s infinitely easier on paper than in the real world. And investors will likely want to see some proof in the new Frontier’s numbers before they give its stock full credit for those ambitions.
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