Agency OKs expected on Frontier buy; Alpha forecast to pass reviews; VNUS on track to close

By Cristal Cody

Tupelo, Miss., May 13 - Frontier Communications Corp.'s plan to buy 4.8 million rural access lines in 14 states from Verizon Communications Inc. for $5.25 billion in stock should pass regulatory muster with a few concessions, an analyst told Prospect News on Wednesday.

In other deals, Alpha Natural Resources, Inc.'s $1.4 billion stock takeover of Foundation Coal Holdings, Inc. is expected to easily pass regulators' reviews, an analyst said Wednesday.

Also ahead, a market source said Covidien, Ltd.'s $440 million acquisition of VNUS Medical Technologies, Inc. is on track to close by late June.

On Wall Street Wednesday, bleak economic reports dampened stocks and sent markets down more than 2.00%.

The Dow Jones Industrial Average lost 184.22 points, or 2.18%, to close at 8,284.89.

The Standard & Poor's 500 index fell 24.43 points, or 2.69%, to 883.92, and the Nasdaq Composite index slid 51.73 points, or 3.01%, to end at 1,664.19.

Frontier expands

Verizon plans to create a separate company called SpinCo for the rural phone assets and simultaneously spin that company off to Verizon shareholders to merge with Frontier Communications.

Frontier approached Verizon with the proposal, Maggie Wilderotter, Frontier's chairman and chief executive officer, said on a conference call with analysts on Wednesday.

"We felt it was time for us to get in front," she said.

Verizon shareholders are expected to receive one share of Frontier stock for every 4.2 shares of Verizon stock.

The transaction has been approved by the boards of Frontier and Verizon.

The deal also must be approved by Frontier shareholders and receive regulatory approvals under the Hart-Scott-Rodino Act and from the Federal Communications Commission and state and local regulatory agencies.

Frontier expects to focus on 10 states that require sale approval or transfers, Wilderotter said on the conference call.

"We have reached out late last night and this morning to several key states and the FCC in bringing this transaction to closure," she said. "We feel very good about the relationships we have with the regulators. We will focus over the next several months on those states."

Frontier Communications representatives did not return a call for additional regulatory information.

Frontier will acquire New York-based Verizon's access lines in Arizona, California, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, Wisconsin and West Virginia.

The transaction will make Stamford, Conn.-based Frontier the largest rural communications services provider in the country.

The companies expect the transaction to close within a year.

Timothy Horan, an analyst with Oppenheimer & Co. Inc., told Prospect News on Wednesday that there will be regulatory scrutiny and probably some concessions the companies will have to make to complete the deal.

"Not too many of these transactions, if any, have been stopped by state regulators," he said. "They might have to promise to do more broadband or maybe have a lower debt level, but the transaction will get done."

Frontier will assume $3.33 billion of debt as part of the transaction. The company also must have financing for $3.20 billion in place at closing to complete the proposal.

Investors pushed shares of Verizon and Frontier down on Wednesday, a drop Horan attributed to the overall fall in markets on dismal economic news.

"The markets are down 3.00%. It's a really good deal for both parties," Horan said. "There will be issues and concerns, but I don't think that will stop the deal."

Frontier's shares lost 28 cents or 3.70%, to close Wednesday at $7.29.

Verizon shares fell 65 cents, or 2.14%, to close at $29.75.

Foundation deal 'positive'

Alpha Natural Resources is buying Foundation Coal at an attractive price, David Khani, an analyst with FBR Capital Markets & Co., said in a client note on Wednesday that was released to Prospect News.

Alpha Natural Resources and Foundation Coal said Tuesday they will combine to form a new coal company in an all-stock deal valued at $2 billion, which includes about $530 million of Foundation Coal debt.

"Due to the minimum overlap in geography, we believe management is correct in that the merger should fly though the approval process," Khani said. "We view this transaction as positive for both companies."

Linthicum Heights, Md.-based Foundation Coal produces thermal coal from mines and facilities in Pennsylvania, West Virginia and Wyoming.

Abingdon, Va.-based Alpha Natural Resources is the nation's largest supplier of metallurgical coal to the steel industry.

Under the terms of the agreement, Foundation Coal stockholders will receive 1.084 shares of the new company for each share of Foundation Coal, which values the stock at $32.73 a share.

The merger must receive approval from shareholders of both companies and regulatory clearance.

The transaction is expected to close in September.

Foundation Coal's stock shed $1.74, or 6.20%, to close at $26.32 on Wednesday.

Alpha Natural Resources shares dropped $1.83, or 6.76%, to close at $25.23.

Covidien on track

Covidien said on Friday it would acquire VNUS for $29.00 a share in cash, a 36% premium to VNUS stock's closing price on the last day of trading before the offer was announced.

San Jose, Calif.-based VNUS develops medical devices to treat an underlying cause of varicose veins.

VNUS shareholders must approve the transaction, and the deal must clear the Hart-Scott-Rodino antitrust application.

The companies expect the deal to be completed by June 30, and the deal looks on track, a market source said.

"There are relatively few conditions to the offer," the source said. "Competition issues are unlikely, and the offer is not conditional on financing."

Also, "other medical devices companies looking to increase their presence in this market could acquire competitors such as AngioDynamics, [Inc.], which trades at substantial discount to VNUS," the source said.

Covidien, a health-care products company, is based in Hamilton, Bermuda, and has U.S. headquarters in Mansfield, Mass.

Shares of VNUS closed unchanged on Wednesday at $28.75.

Covidien's stock gained 67 cents, or 1.93%, to close at $35.40.

Shares of Queensbury, N.Y.-based AngioDynamics fell 42 cents, or 3.03%, to close at $13.43.

Mentioned in this article:

Alpha Natural Resources, Inc. NYSE: ANR

AngioDynamics, Inc. Nasdaq: ANGO

Covidien, Ltd. NYSE: COV

Foundation Coal Holdings, Inc. NYSE: FCL

Frontier Communications Corp. NYSE: FTR

Verizon Communications Inc. NYSE: VZ

VNUS Medical Technologies, Inc. Nasdaq: VNUS

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