Proposed sale of 4.8 million Verizon lines to Frontier will harm consumers in rural America

The Communications of America raised strong concerns about the proposed sale of 4.8 million landlines in 14 states by Verizon Communications to Frontier Communications, in a filing to the Federal Communications Commission. The deal as currently structured will cause substantial harm to consumers and communities, will be a step backward in terms of high speed broadband buildout and is contrary to the public interest. CWA pointed to Verizon's track record and the poor outcomes for consumers of similar sales to FairPoint Communications, Hawaiian Telecom and Idearc, Inc. These three deals all have resulted in hardships and service restrictions for consumers in those regions, CWA said.

In its FCC filing, CWA stressed that the acquisition of 4.8 million landlines by Frontier would put enormous pressure on the company, and as it is currently structured, Frontier would not have the resources to improve service and expand broadband to the primarily rural areas it would acquire from Verizon.

The deal would burden Frontier with an additional $3.4 billion in debt, requiring the transferred properties to produce six times the revenue they do now to service this debt. Neither Frontier nor any other company its size has ever taken on a deal of this magnitude, one that requires the integration of 4.8 million lines over 14 states. Frontier would have to manage a company with triple its current number of access lines and employees. In West Virginia, the deal requires Frontier to integrate all computer systems on the day the deal closes. In the 13 other states, Frontier will be under financial pressure to move to its own systems as soon as possible in order to stop paying rent to Verizon and to meet its projected $500 million "synergy" targets.

CWA reminded the FCC that it took Frontier seven years to integrate the approximately 500,000 lines it purchased from Rochester Telephone in 2001, and even then there were serious service problems. CWA raised serious concerns that Frontier will be able to implement a smooth integration and avoid the disastrous experience that is taking place right now as a consequence of Verizon's landline divestiture in northern New England to FairPoint.

The world class fiber optic network and high speed broadband generally now enjoyed by consumers in parts of four states would be affected. In Washington, Oregon, Indiana, and South Carolina, Verizon's fiber-to-the-home FiOS network passes 600,000 homes in these states and serves 140,000 FiOS Internet and 103,000 FiOS TV subscribers. While Frontier claims it will continue to provide video programming to current customers, it is not at all clear that the company, which has never operated a video system before, would have the resources to support increases in programming and other costs spread over a much smaller viewing audience and revenue base. In some areas almost certain to be affected by the sale where Verizon hasn't deployed FiOS, Verizon is offering a high-speed DSL service that operates at more than twice the speed of Frontier's offering.

The transaction poses tremendous financial and operational risks of harm and has no countervailing public interest benefits. Frontier has made no definite, verifiable, or enforceable commitments in terms of broadband build-out or improvements in service to consumers, and in fact, the company projects a 21 percent or $500 million cut in operational expenses, which would limit funds for investment in plant, customer service, and staffing. This transaction as currently structured will harm not only the almost 5 million consumers and the hundreds of communities in the 14 states in which landlines will transfer from Verizon to Frontier, but will adversely affect the 2.3 million current Frontier customers in 24 states that will suffer as the new Frontier diverts financial and human resources to meet merger-related debt obligations and operational challenges.

The driving force behind the transaction is tax avoidance. Given these financial and operational risks, CWA pointed out that the real reason behind the deal is Verizon's desire to dump many of its rural properties in a tax-free deal. Utilizing a loophole in the tax code, Verizon will receive $3.3 billion tax free money, while Verizon shareholders will end up as involuntary owners of about 68 percent of the increasingly debt-laden Frontier.

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