In my opinion, monies already spent just in West Virginia demonstrate that Frontier has under-estimated total capex spend needed to upgrade and integrate high-speed backbone of acquired Verizon legacy assets: In the last year alone, Frontier spent more than $300 million to build 305 remote broadband delivery sites, according to company vice-president Dana Waldo.
The company plans on spending in the range of $810 million to $840 million for its 2011 construction and broadband build-out program, included in this budget are p
rojects targeting the first four (MI,IN,NC, and SC) off the other acquired 13 other (state) properties. Cost overruns resulting from this expanding IT investment program – converting erstwhile Verizon systems onto existing Frontier systems – could cripple an already constrained liquidity picture for dividend payouts going forward.
Additionally, the aforementioned $750 million credit facility is available only for general corporate purposes – and cannot be used to fund any dividend payments!
Can you hear me now?
Removing costs from the liquidity equation in coming quarters could also be hindered by competitive pressures (substitute wireless service offerings from other providers), forcing Frontier to respond with increasing dollars directed toward promotional spending (like equipment and modem giveaways). Financially-strapped municipalities at the state and federal level are also making more noise about reducing rural subsidy initiatives and third-party roaming charges (about 12 percent of aggregate sales).
In addition to slowing network integration, accelerated losses of legacy access lines could result in impairment write-downs, too. Though not a “cash drain,” goodwill/intangibles represent 48.3% of Frontier’s $17.8 billion of total assets. Consequently, write-downs could prove material to shareholder equity – and, in turn, raise future borrowing costs (currently averaging about 8 percent on long-term debt).
Until Frontier can actually demonstrate improvements in its financial flexibility and do more than just “talk” about the supposed benefits to be had from the Verizon deal, expect the company to hang-up on calls to maintain that juicy 10 percent dividend yield.
-David Phillips
