Friday, April 7

Today we acquired a position in Frontier Communications (FTR), a player in phone/broadband/cable in the midwest. Last year they paid $8.5 billion in an all-stock deal with Verizon to acquire Fios lines in Texas, Florida, and California – areas where consumer satisfaction was so low that Verizon no longer believed they could remain in those markets. Since the deal FTR has faced an uphill battle attempting to fix the systems Verizon left behind, and has faced particular criticism for the poor performance of their call centers located in the Philippines. However, all of this said I believe that FTR will find profitability within the next two years after they bring their new acquisitions back up to a tolerable reliability level.

The share prices of common stock have plummeted since the acquisition, and the existing dividend is under threat next quarter. However, we took a position in the preferred shares which are currently trading massively under face value. This (cumulative) dividend now sits at a very comfortable 22.88% annual yield. Before this dividend can be threatened the common stock dividend has to disappear – which it hasn’t yet, and analysts are still somewhat confident that it won’t. On top of that, if and when this deal manages to stabilize these preferred shares will quickly move back towards face value, generating a substantial capital gain on top of very generous quarterly payments.

Due to the wide range of risks involved we’ll definitely have to keep a close eye on any new developments with this company.

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