Hallmarks of a Successful Deal: Frontier’s recent acquisition offers a road map to M&A planning and execution

Wednesday, May 4, 2016 - 12:50

Mark Nielsen, general counsel of Frontier Communications Corporation, outlines his role as the in-house lawyer for M&A evaluation and execution, as well as provides his reflections on Frontier’s recently completed transaction with Verizon Communications. The acquired businesses include approximately 3.3 million voice connections, 2.1 million broadband connections and 1.2 million Fios subscribers. His remarks have been edited for length and style.

MCC: Please describe the recent transaction with Verizon.

Nielsen: Frontier Communications acquired Verizon’s operating subsidiaries in California, Texas and Florida for $10.54 billion in cash and assumed debt. The transaction doubles Frontier’s size – to approximately $11 billion in annual revenues – and brings the company within the ranks of the Fortune 300. From a relatively small, rural telephone company in 2009 with annual revenues of approximately $2 billion, Frontier has transformed itself through a series of three transactions (in 2010, 2014 and now 2016) into one of the largest communications companies in the United States.

Our transaction with Verizon involved enormous complexities – legal, regulatory, financial, technological and operational – and I am proud of the critical role Frontier’s legal department played in each of these areas. The transaction was truly a massive team effort.

MCC: Can you break that down to the specific components for us, starting with the strategic picture?

Nielsen: To be successful, a transaction must align closely with the company’s overall business strategy. The business operations that we have acquired from Verizon are a core business for Frontier, utilizing our core competencies as a company. Frontier has a different business strategy than Verizon, so this transaction clearly made sense for us. Frontier can operate a wireline video, broadband and voice business at significantly lower cost – particularly lower overhead cost – and we are expert at maximizing the value of legacy copper wireline properties while also being highly capable with fiber optic networks. In fact, Frontier has a new product, Vantage TV, that allows us to deliver high-quality video efficiently over existing copper networks, which is much less capital intensive than putting fiber optic cable in place everywhere.

In addition to playing to our core competencies, the transaction is beneficial from a tax perspective. It is structured as a stock deal with an IRC Section 338(h)(10) election. This means that the acquisition will be treated as an asset purchase for tax purposes, with the accompanying tax benefits resulting from higher depreciation following the write-up of the acquired assets.

MCC: With a value-adding transaction identified and structured, what steps were needed to get the right deal negotiated?

Nielsen: One of the first things we did was to carefully consider the lessons learned from our prior major acquisitions, including the 2010 deal with Verizon covering its wireline service territories in 14 states and our 2014 deal with AT&T covering Connecticut. This was an important first step for us.

It is absolutely critical to have the right people in place. On the in-house side, I had brought Jeff Conner into Frontier’s legal department as my deputy general counsel. Jeff has 25 years of experience in high-level M&A, corporate finance and securities work, including the prior 10 years at Dole Food Company. He provided critical counsel on some challenging issues throughout the transaction.

For outside counsel, I hired one of New York City’s preeminent law firms, and we worked to establish an appropriate working relationship with the firm. It is vital that outside counsel understands that it takes its direction from the company’s legal department. Outside counsel must not see itself as controlling the deal or controlling the negotiation of the deal – and this must be made clear at the outset.

Another key driver of success is continuous consultation with the relevant leaders in the business about which negotiation issues are the most important or contentious, and why. However well informed the lawyers may be on a deal, they will never know as much about the business as the operational leaders. These leaders must be comfortable with the content of the representations and warranties, covenants (especially operating covenants effective between signing and closing), schedules of included assets, ancillary agreements, and the like.

Also important to the success of the deal is the character, depth and quality of the due diligence effort. This is critical not only to assess the value of included or excluded assets and liabilities but to adequately understand the specifics of the acquired business well enough to plan the integration effort and successfully run the business after closing. For these reasons, the company’s business people, in addition to its lawyers, must be intimately involved in the due diligence effort.

Lastly, in a transaction like ours with more than a year between signing and closing, the operating covenants must be very carefully considered. Our focus in this regard was to ensure that the Securities Purchase Agreement and the ancillary agreements gave both parties the proper incentives to play it straight and avoid self-advantaging behaviors preclosing. This had the intended consequence of minimizing wasteful defensive behaviors so that both sides could focus on completing the transaction as swiftly and efficiently as possible.

MCC: What do you regard as a key lesson concerning the financing efforts in making the transaction a success?

Nielsen: Frontier financed the acquisition through a combination of a registered offering of common and convertible preferred stock, a delayed-draw Term Loan A, and a Rule 144A offering of three series of unsecured senior notes. Frontier was very proactive in getting the financing done, to the point that we had completed the financing six months before the closing. By being so proactive, we eliminated any financing risk, pressure and distraction, allowing management to focus on integration planning and implementation, as well as running our existing businesses.

MCC: Could you comment further on Frontier’s integration efforts?

Nielsen: Frontier put an enormous effort into integration planning and execution. It was almost like the moon landing. We invested time and resources on each aspect – operations, technology, human resources/labor and employee relations, government relations, tax, public and investor relations, marketing and customer communications. Frontier’s integration effort spelled out every needed step, small and large, and assigned responsibility for each one. This planning effort included not only the optimistic case but also contingency planning in the event that problems arose. We worked to anticipate both preclosing and postclosing issues.

The integration involved many departments and sub-departments in both Frontier and Verizon. In the 14 months between signing and closing, we dealt with innumerable issues with Verizon. Under these circumstances, we understood that frictions could easily arise. We appointed the head of our integration team as our senior contact person with Verizon, and Verizon similarly named a senior contact person on their side. All disputes beneath this top level were not allowed to fester but instead were expeditiously elevated to the one-on-one top relationship for efficient resolution. This process ensured that we established and maintained a cooperative partnership. It was highly successful, as it should have been, since after all, the transaction was desired by, and in the best interest of, both Verizon and Frontier.

I received a note the other day from the head of Frontier’s integration team, offering thanks for the positive role played by what he referred to as the “friendly lawyers” from Frontier’s legal department. Too often it seems that lawyers are seen as those who say no and obstruct things that need to get done. He was commenting that the lawyers in Frontier’s legal department were, instead, constructive, helping him get to yes with Verizon and solving a number of complex integration issues and challenges. His note represents a major achievement for our legal team and positions us as solid business partners – precisely where we need to be in order to give our best counsel.

MCC: You had to obtain federal and state regulatory approval before the transaction could close, and as a public company dealing directly with millions of residential and business customers, you had to deal with investor and public relations. What were the main challenges in these areas?

Nielsen: That’s right. We had to obtain federal antitrust clearance under the Hart-Scott-Rodino Act. We also had to obtain approval from, among others, the Federal Communications Commission and the utilities commissions in California and Texas. These are very effort-intensive undertakings. The regulatory authorities are appropriately interested in understanding, at a very detailed level, the many aspects of the transaction to ensure that affected constituencies, and the public overall, will be protected. We worked very hard to make that case – to meet with, engage in negotiations and ultimately enlist the support of the many interested constituencies – in a fashion that was mindful of their legitimate interests and also of our need to be in a position to run an efficient and profitable business postclosing.

Concerning investor relations and also public relations, which reports to me, we adopted what I firmly believe is the only sustainable principle: transparency. We worked to give realistic estimates of, for example, anticipated synergies, and we updated those estimates as we received better and more complete information. We were clear and direct on projected accretion to free cash flow per share and on the projected reduction in our dividend payout ratio.

On the public relations side, we introduced ourselves to our new customers in a straight and respectful way, without hype or overpromising. And when a number of operational problems occurred immediately postclosing, we responded quickly in easy to understand terms with as much information as possible. We said what we knew and what we didn’t know. We explained why there were service interruptions, identified the cause and gave an estimated time for service restoration if we knew the information. I am a big believer that today’s consumers are very sophisticated and appreciate it when a company just levels with them. With the influence of social media, companies must respond quickly, honestly and frequently.

MCC: Any final thoughts?

Nielsen: I am very proud to have been part of such a magnificent team effort, under superb leadership at the top of Frontier, and I am equally proud of the people on my team for their outstanding professional service during this complex, difficult and enormous undertaking. This is a transformative transaction for our company that helps put Frontier on a path to sustainable growth – a win-win for our employees, customers and shareholders.