Leading telecom carrier, AT&T Inc. (T - Analyst Report) is selling its incumbent local wireline operations in Connecticut to Frontier Communications (FTR - Analyst Report) for $2.0 billion in cash. AT&T does not expect this divestiture to have any significant impact on its financials as it contributed only 1% to its total annual revenue in 2012. The company expects the transaction to close in the second half of 2014.
The deal is expected to include the sale of 900,000 voice connections in Connecticut. This includes U-verse Voice over IP and traditional voice services. In addition, AT&T will also provide Frontier with its approximately 415,000 broadband connections in the region, which would incorporate 245,000 U-verse and 70,000 DSL customers.
In addition, Frontier will also have access to AT&T’s 180,000 U-verse video subscribers. Moreover, AT&T will transfer its 2,700 employees managing its Connecticut operations to Frontier as the deal closes.
AT&T expects the sale proceeds to remain accretive to its project VIP initiative, which targets business expansion. These include expanding 4G LTE, enhancing spectrum and network capabilities, expanding U-verse services to 8.5 million new customer locations and expansion of broadband services to 57 million users, covering 75% of the company’s wireline footprint by the end of 2015.
Apart from selling its Connecticut wireline operation, AT&T also struck a $4.85 billion deal with Crown Castle International Corp. (CCI - Analyst Report) recently for leasing 9,100 of its wireless towers and selling an additional 600 towers.
We believe AT&T’s decision to streamline its business operations would enable it focus on growth areas shoring up its prospects. The company’s wireline division continues to struggle with persistent losses in access lines as a result of competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by the cable companies. In such an event, we believe divesting businesses with lower yields remains a lucrative decision in terms of revenues and cost.
However, the company is currently banking on strong business revenues and enhanced strategic services to uplift its wireline market. Consistent subscriber growth in the U-verse segment is expected to continue in the coming days, leading to higher revenues. In terms of U-verse broadband speed, AT&T increased its speed to up to 45 megabits per second, which is available to almost two-third of the U-verse customer base.
The company is further trying to deploy speeds of up to 75 megabits per second and faster in the future. We believe that the expansion of U-verse services will continue to boost data revenues and ARPU (average monthly revenue per user) in the wireline segment. Further, AT&T has expedited the deployment of 100% fiber broadband network in Austin, Texas that promises speeds up to 1 GB per second.
AT&T has a Zacks Rank #3 (Hold).