The Verizon-Frontier deal hangs in the balance as investors demand a higher price

As a crucial meeting with investors approaches, Verizon's ambitious $20 billion acquisition of Frontier Communications has reached a turning point. Investors are calling for a substantial price increase, signaling that the initial offer may not be enough to convince Frontier's largest shareholders. With the growing demand for high-speed Internet needed for complex data applications, this acquisition would allow Verizon to strengthen its fiber-optic Internet capabilities – a strategic element critical to its long-term growth. The deal's future remains uncertain, however, amid competing bids and shareholder hesitancy that threaten to derail Verizon's plans.

Investors' demands for a higher valuation

Verizon's initial offer of $38.50 per share for Frontier represented a 44% premium to Frontier's trading range at the time. Despite the generous premium, Frontier shareholders believe the company's growth trajectory in fiber Internet services warrants a much higher valuation — about 30 percent more than Verizon's proposal. That raise would bring Frontier's per-share value to more than $50, reflecting shareholder confidence in the future of fiber-optic networks.

The recent $3.6 billion acquisition of Ziply by Canada's BCE, a company with a fiber network similar to Frontier's, further fueled investor demand. They argue that Verizon's offer undervalues ​​Frontier given the premium paid in the Ziply deal. Among those pushing for a higher price are Glendon Capital Management and Cerberus Capital Management, which together own about 17 percent of Frontier's stock.

Key Players and the Influence of Proxy Advisors

Adding to the tension, Ares Management, Frontier's largest shareholder with a 15 percent stake, has yet to disclose its position. Ares has hired investment bank Houlihan Lokey to evaluate its options, a sign it is carefully weighing the potential benefits and risks of accepting or rejecting the current offer.

Meanwhile, proxy advisers Institutional Shareholder Services (ISS) and Glass Lewis recommended investors abstain from voting on the deal next week. This abstention amounts to a rejection of the current offer. Their recommendation reflects the view that shareholders could benefit by waiting for a higher offer, as ISS explained: "Given the possibility of substantially higher value over the long term and the lack of urgency to approve a transaction that is not projected to close any longer one year early, it seems reasonable for shareholders to exercise their option to abstain for the time being.”

The risks of independent strategy for Frontier

Frontier, which emerged from bankruptcy in 2021 after shedding billions in debt, has reestablished itself as an independent business. While the proposed deal with Verizon could be lucrative, it's not the only way forward for Frontier. The company's share price hovered around $34 last Friday, leaving some analysts skeptical of shareholder expectations for the company's valuation.

In a recent note, Nick Del Deo, managing director at MoffettNathanson, outlined the potential risks of rejecting the offer, explaining that shareholders' choice comes down to "$38.50 per share in cash or an independent future, with the risks and opportunities that this path involves them." Frontier has signaled it would return to its stand-alone strategy if shareholders reject Verizon's proposed terms.

The competitive environment in fiber optic networks

The pressure on Verizon to complete the Frontier acquisition is heightened by the competitive environment between the telecom giants. T-Mobile recently made waves by announcing joint ventures with private equity firms EQT and KKR to acquire fiber network operators Lumos and Metronet. The moves underscore rapid change across the industry as telecom operators ditch traditional copper infrastructure and invest in fiber networks to keep up with growing demand for high-speed internet. Frontier and its rivals are racing to build fiber networks capable of handling the large volumes of data imposed by emerging technologies, especially artificial intelligence.

The broader implications for Verizon

For Verizon, the Frontier acquisition is more than a tactical expansion; is a strategic investment in its fiber network capabilities to meet increasingly complex customer requirements. If the deal goes through, it would put Verizon in a more competitive position against cable broadband providers as expansion of fiber networks becomes crucial to meet future data demands.

With the investor meeting looming and demands for a higher price pending, Verizon's bid to acquire Frontier illustrates both the high stakes in today's telecom landscape and the fierce competition shaping the future of digital connectivity. As negotiations continue, the question remains: Will Verizon be able to complete the deal, or will shareholders wait for a more attractive offer?