Derivative Action Says Frontier Overhyped Verizon Deal

(CN) – A shareholder derivative complaint alleges Frontier Communications misled the public about its acquisition of Verizon’s wireline operations, which garnered lower than expected revenues and left the company open to shareholder lawsuits after the stock dropped in value.

The complaint was filed in the U.S. District Court of Connecticut by shareholder Cynthia Graham against CEO Daniel J. McCarthy and board and compensation committee members.

Frontier announced the $10.54 billion acquisition of Verizon’s California, Texas and Florida wireline operations in February 2015, a transaction deemed “incredibly important to the company,” the suit says. “This transaction increases Frontier’s growth profile and reduces our exposure to declining portions of our business, improving our business mix significantly,” said McCarthy in an August 2015 earnings conference call.

According to the complaint, beginning in August 2016, Frontier announced financial results and issued statements to the Securities Exchange Commission, allegedly failing to disclose that Frontier acquired a large number of non-paying accounts from Verizon, forcing the company to increase its reserves and write off significant amounts from the delinquent accounts. The complaint further alleges that integration costs for Verizon’s operations were much higher than expected and that major cost-cutting initiatives were required to avoid breaching Frontier’s debt covenants, resulting in lower than anticipated revenues.

On May 2, 2017, the company held an earnings call to discuss first quarter 2017 financial results, revealing that revenue declined by $53 million, attributing $16 million of that to the non-paying accounts, and that customer revenue was down $51 million.  Frontier’s share price fell more than 16 percent the following day.

Frontier has been hit with securities class actions connected to the Verizon deal. The current complaint notes that Frontier and its shareholders are “required to expend significant sums of money to defend the suit and faces liability well into the millions of dollars to settle or satisfy a judgment of that suit.”

Graham is represented by Amanda F. Lawrence of Scott+Scott Attorneys at Law LLP in Colchester, Conn., Geoffrey M. Johnson in Cleveland Heights, OH., and Joe Pettigrew in San Diego.

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