DA Davidson Upgrades Frontier Communications, Cuts Price Target

In a report published Wednesday, DA Davidson analyst James G. Moorman upgraded the rating on Frontier Communications Corp (NASDAQ: FTR) from Neutral to Buy, while lowering the price target from $7.00 to $6.50.

The company intends to offer equity worth $750 million and mandatory convertible preferred stock worth $1.75 billion. The company intends to use the proceeds from the offering, along with a later debt financing initiative, to purchase access line in Florida, Texas and California from Verizon Communications Inc. (NYSE: VZ) in 1H16.

"The deal is expected to close in the first half of 2016 and bring proforma revenue to roughly $11.7 billion with EBITDA of $4.9 billion. The company expects to incur $450 million in integration costs, which includes $85-$135 million in opex and $100 million of capex in 2015, with the rest in 2016," Moorman explained.

The analyst now expects the deal to be about 30 percent accretive to the company's leveraged free cash flow in its first full year, while lowering the dividend payout ratio. "We believe the shares have been under pressure due to concerns on the timing and the amount of the equity offering. With a high component of convertible preferred stock, the equity portion might be slightly below expectations," the DA Davidson report said.