Verizon, Frontier face regulatory squeeze

"We would not expect [states] to block the Frontier deal, ultimately," Stifel Nicolaus analysts wrote. "We believe it is more likely that some of them will use their leverage to demand and extract concessions on broadband build-out, service quality, jobs, and possibly related financing issues, which could come through a combination of voluntary commitments and binding conditions…Long-term, Frontier and Verizon can plausibly argue that their deal will have the benefit of creating greater broadband competition between Verizon Wireless, as it migrates to LTE, and Frontier's wireline service."

In a conference call this week, Frontier Chief Executive Officer Maggie Wilderotter also pointed to the company's plans to reduce its dividend payout ratio as a signal to regulators that it plans to invest in its new markets. "We think a de-leveraging transaction with a decreased payout ratio and our focus as a company on broadband are great stories for regulators," Wilderotter said.

And in an interview with Telephony this week, Frontier's chief operating officer, Dan McCarthy, said the company will emphasize to regulators that its plan for migrating back-office systems is different than the ones that led to service problems for Fairpoint and Hawaii Telcom. "One of the biggest issues I think Fairpoint ran into was their ability to convert the systems onto their own," he said. "They were trying to build their own systems from scratch. We're not going to have that issue."

Stifel Nicolaus analysts don't expect the FCC to block the deal either, though it could squeeze the two carriers along the way. "The two democratic FCC commissioners (Adelstein and Copps) dissented on their approval from the Verizon-Fairpoint transaction, which they believed should have been subjected to greater scrutiny," the analysts said. "Mr. Adelstein in particular suggested 'special measures' in order to address broadband deployment, wholesale service, and service quality. While he is expected to leave the FCC in coming months for another federal position, we believe his general thinking could be adopted by the new democratic-run FCC and result in some conditions on the new deal."

Moffet concurred, writing, "Regulators in an all-democratic Washington are likely to be wary of the risk of stranding significant parts of the country's wireline infrastructure."