Verizon Announced Series Of Attractive Transactions

VZAfter the close, Verizon (NYSE:VZ) announced a pair of asset sales that had been speculated by investors to be completed. First, the company will sell wireline assets in 3 states to Frontier Communications for approximately 10.5B including the assumption of about $600m in debt. Second, the company entered into a master prepaid lease agreement covering roughly 11,300 towers and outright sale covering roughly 165 towers with American Tower. Together with cash on hand and a term loan to finance the balance of the company’s recent spectrum auction purchase, the company plans to initiate an accelerated share repurchase program and continue to pay down debt (in 2016 once the proposed wireline transaction closes) such that the deals will be accretive to shareholders while allowing the company to continue to de-lever in the 2018-2019 timeframe as originally proposed when the company bought out Vodafone’s stake in the wireless assets.

Sale to Frontier

The company plans to sell wireline assets to Frontier Communications covering approximately 1.6m FiOS internet customers, 1.2m FiOS video customers and 3.7m voice connections in Florida, Texas and California for approximately $10.5B with expected net cash proceeds of roughly $6.8B. The transaction will better align the company’s geographic footprint around the eastern states. Despite having to assume some of the costs associated with the assets, management is pursuing initiatives to mitigate the financial impact between now and expected closing next year.

Tower transaction

The company is turning over economic control of nearly 11.5k towers to American Tower, the vast majority of which will be through a master prepaid lease arrangement. The company will sublease capacity for a minimum of 10 years at $1,900 per month with annual rent increases of 2% and access to additional reserve capacity for future use (very similar to the deal between AT&T and Crown Castle in late 2013). American Tower will have fixed-price purchase options to acquire the leased towers at the end of the lease terms, which average about 28 years. The company will receive about $5B in up-front payment.

Accelerated share repurchase plan

With the balance of the company’s spectrum auction purchase (roughly $9.5B) due within a month, the company articulated its funding plan in conjunction with the asset sale announcement. As part of the plan, the company will initiate an accelerated share repurchase program of roughly $5B with cash on hand, 85% of which will be for immediate delivery and will reduce dividend payments while being immediately accretive to EPS (management suggested 7c-9c in 2015 versus initial guidance). The company plans to use a term loan and remaining cash on hand to fund the spectrum purchase, while proceeds from the tower sale, which is expected to close within 60-90 days, would then be used to pay down the term loan. The net result is the company will be able to fund its spectrum purchase while continuing to pay down debt according to its long-term de-leverage target and returning additional cash to shareholders through the repurchase.

Shares of Verizon Communications closed yesterday at $47.86 . VZ has a 1-year high of $53.66 and a 1-year low of $45.09. The stock’s 50-day moving average is $46.97 and its 200-day moving average is $48.16.



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