Lowering Our Fair Value Estimate on Frontier

We have taken a fresh look into

We believe the next two years would be critical for the firm to turn around the current trend. In a nutshell, our base case for Frontier assumes the firm to reignite Internet and video customer growth in 2018 after experiencing smaller customer loss in 2017, relative to 2016. We project that total revenue will decline by 13% on a pro forma basis in 2017, and 4% in 2018, and grow at a modest rate below 2% per year thereafter. This rate also assumes continued decline in sales from residual and business phone lines. We also assume very modest growth in average revenue per Internet and video customer, respectively, reaching 1.5% per year by 2021.

Key to our thesis is management’s ability to control costs after completing the Verizon acquisition, which should keep the EBITDA margin relatively flat despite topline weakness. We also expect the firm to scale back capital spending to about 12% of sales to preserve cash to meet a total debt load of $6.9 billion over the next five years, over 72% of which is due in 2020 and 2021. Finally, we fear that the current dividend might not be sustainable in the long term.

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