Verizon, Frontier face regulatory squeeze

Before Frontier Communications (NYSE: FTR) can triple in size with the addition of nearly 5 million access lines and Verizon (NYSE: VZ) can boost its fiber-to-the-premises network coverage to nearly 70% of its local territory, the two carriers must get approval for the deal from regulators at the state and federal level. And considering the operational problems that ensued the last two times Verizon divested its wireline assets (in Hawaii and northern New England), regulators are not likely to be getting out their rubber stamps any time soon.

As Craig Moffet, vice president and senior analyst with Bernstein Research, put it in a note this week, "A key question, of course, is whether [this] divestiture is possible."
The last deal of this sort, Fairpoint Communications' purchase of Verizon assets in three New England states, started with a famously grueling regulatory battle that burned up nearly a year. And that deal involved just three states, while Frontier is buying assets in 14.

For starters, however, Frontier says it only needs approval in 10 of those 14 states, and in six of those 10, Frontier already has a presence and, the company said, a good relationship with regulators. Still, six is more than three.

Some analysts have argued that state regulators in New England are, as a rule, especially rigorous, suggesting a smoother process in other states. But the integration problems Fairpoint has seen since getting those states' okay could motivate other state regulators to exercise greater scrutiny of such deals. 

In a research note this week, Stifel Nicolaus analysts said they don't expect much regulatory trouble from the states, since Frontier is sure to increase broadband availability in the acquired areas (which is at about 60% today, whereas Frontier's is 92%), and the deal actually greatly improves the carrier's debt profile, which reduces the financial risk of the entire operation. That last bit wasn't true for Fairpoint or Hawaii Telcom.