Bernstein: Verizon line sale threatens op income

Having off-loaded yet another collection of rural wireline properties last week, this time to Frontier Communications, one might assume that Verizon is ready to live the high life, unburdened by the need to maintain lines with low future revenue potential and free to focus on FiOS and 4G. But another read of the situation is that the departed cash flow from the lines it spun off and sold to Frontier may leave Verizon hurting for operating income in its wireline segment.

That’s the view from Sanford C. Bernstein & Co. senior analysts Craig Moffett and Robin Bienenstock, who, following the deal’s completion, lowered their price target for VZW stock from $27 to $25.

“Without these access lines, we project that the wireline segment – which still accounts for ~70% of Verizon's asset base (proportionate for VZ's 55% ownership of VZW) – will produce negative operating income going forward,” the analysts said in their research report, adding that while “the divested properties accounted for just 8.8% of Verizon's wireline revenues in 2009, they contributed an incredible 53.7% of wireline's pre-tax operating free cash flow [EBITDA less capex].”

Furthermore, even as Verizon is winding down its FiOS market expansions and focusing on cultivating the revenue opportunities in its existing markets, “the unlevered free cash flow [Verizon’s wireline] segment produces will be immaterial,” according to the analysts. The company’s wireline business is further challenged by an existing $35 billion debt burden.

The Bernstein team said it expects Verizon’s wireline unit, which comprises both regional residential and enterprise lines and accounts for 65% of the company’s proportionate assets, to generate $520 million in EBITDA less capex in 2011, only $428 million in 2012 and eventually decline into negative territory after that.

Bernstein is not the only agency to reduce its target price for Verizon’s stock. Auriga also lowered its target from $31 to $29.