Is Verizon Communications (NYSE: VZ) about to open its wallet for a massive new acquisition?
That was the scuttlebutt on the stock market Wednesday, and on potential news that the incumbent telecom might spend a pretty penny for a deal, investors traded out of its shares. In late-session trading Verizon's price was down by nearly 4%, a more dramatic slide than the 0.4% sag of the S&P 500 index at the point.
A potential deal that could easily top $10 billion
The Wall Street Journal published an article today stating that Verizon is far into discussions to acquire broadband internet specialist Frontier Communications (NASDAQ: FYBR). Citing unnamed "people familiar with the matter," the financial newspaper wrote that an announcement of a deal could come as soon as this week.
If realized, such a purchase would be sizable. On news of the potential deal, investors bid up Frontier's stock sharply, pushing its market cap to over $9.5 billion. That's expensive even for a monster business with sustainably high levels of free cash flow (FCF) like Verizon. The already heavily indebted company would almost certainly have to find some outside sources of financing, as its cash and short-term investments totaled under $3.8 billion at the end of June.
In contemplating a Frontier buyout, it's likely Verizon aims to be more competitive in the broadband segment. Mobile service providing isn't exactly a hot growth area these days, while numerous regions of this country are still underserved by high-speed internet.
Easy integration?
While integrating two large enterprises is never a quick or easy task, Verizon and Frontier are relatively compatible. The latter's broadband operation, currently being upgraded to fiber technology from legacy copper wiring, roughly complements Verizon's Fios network.
Neither Verizon nor Frontier has yet officially commented on the Journal article.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
Why Verizon Stock Was Wilting on Wednesday was originally published by The Motley Fool