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Verizon, Union Sign New Labor Deal

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After a long 16 months of negotiations, the largest U.S. mobile service provider Verizon Communications Inc. (VZ - Free Report) recently reached a new three-year tentative agreement with two labor unions, including 45,000 employees. The old contract expired on August 6, 2011. The two labor unions are Communications Workers of America and International Brotherhood of Electrical Workers.

This new deal seems to have resolved the dispute that led to the 14-day strike in August last year after the company failed to negotiate the new labor contract. The employees involved in the strike were from the company’s Wireline division in the Mid-Atlantic and Northeast regions, which is losing money to cable-TV carriers.

Though Verizon’s efforts to freeze employee pensions and change some job security pensions failed, the new contract requires the employees to contribute for healthcare benefits. The new contract also appeals for an 8% increase in wages over four years. The wage hike will be effective from August 2011 and will continue through August 2015. The deal will take about a month for final approval.

Many of the workers covered under the new contract are technicians that install and maintain the company's FiOS fiber-optic network, which represents an integral part of the carrier’s long-term growth strategy.

During the recently concluded second quarter, the company added 120,000 and 134,000 new customers to its FiOS Video and FiOS Internet services, respectively. The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS Video increased to approximately 36.6% and 32.6%, respectively, across all markets from the year-ago respective levels of 33.9% and 29.9%.

Verizon is poised for healthy wireline growth through product streamlining and process simplification initiatives as well as cost management actions. However, the company faces stiff competition in deploying FiOS fiber-optic network from cable operators such as Comcast Corporation (CMCSA - Free Report) , Time Warner Cable Inc. and Cablevision Systems Corporation .

We are maintaining our long-term Neutral recommendation on Verizon. The stock retains the Zacks #3 (Hold) Rank for the short term (1–3 months).

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