Frontier (ticker: FYBR) has embarked on an extensive and expensive transformation. The company is moving away from its outdated copper wire network and embracing a modern, fiber-optic cable infrastructure. This transition requires significant investment, but once completed, it promises cost-effective operation and superior performance compared to older technologies.

The Challenge of Financing

The process has faced its fair share of obstacles. Higher interest rates and a recent stock-market downturn have increased the cost of financing this ambitious endeavor. While the transition to fiber holds great promise, investors have been reluctant to fully back Frontier. Since emerging from bankruptcy in May 2020 at $30 per share, the stock has steadily declined, halving in value by the summer of 2023.

An Undervalued Gem?

Despite its uphill battle, Frontier's potential remains untapped by the market. Recent positive momentum led shares to rise by 13% last week, currently trading around $18.80. However, even at this price, investors fail to recognize the true value of Frontier's forthcoming fiber network. Wall Street analysts, on the other hand, have set an average price target of $32.36, signaling a potential 75% upside.

Exploring Strategic Options

Scott Ostfeld of Jana presented a compelling case for Frontier's future at a conference recently. He believes that the company's value and investment needs would be better recognized and addressed under private ownership. As such, Ostfeld proposed that Frontier put itself up for sale. Potential buyers could include larger, well-capitalized telecom companies or private-equity firms.

The Search for Suitors

While Jana declined to comment on specific partners or interested parties, Ostfeld mentioned that they have joined forces with a "major communications company" for their investment in Frontier. This suggests that acquisition interest already exists. However, regulatory challenges would likely block cable giants like Comcast (CMCSA) or Charter Communications (CHTR) from entering the bidding process. AT&T (T) and Verizon Communications (VZ), with their own fiber networks and current focus on debt reduction, may not be actively seeking acquisitions either.

Frontier's Commitment

Frontier, through its Board of Directors and management team, remains dedicated to creating long-term value for its shareholders, employees, and customers. The company continues to take actions aligned with this objective.

The transition to fiber is an arduous journey for Frontier, necessitating substantial investments. However, once completed, it promises cost efficiency, superior performance, and untapped potential. While investors are yet to fully recognize this, the interest of a major communications company and the average price target by Wall Street analysts indicate a bright future lies ahead for Frontier.

T-Mobile US Eyed as Potential Investment Partner for Frontier

By process of elimination, T-Mobile US (TMUS) emerges as Jana's most likely partner to invest in Frontier. With the financial benefits of its Sprint acquisition becoming evident, T-Mobile is experiencing an increase in earnings and free cash flow, while reducing leverage.

T-Mobile has shown interest in fiber investments, particularly in pursuit of "convergence" - the ability to offer bundled wireless and home internet service. Acquiring Frontier would not only significantly accelerate T-Mobile's fiber efforts but also introduce a declining copper-based business.

PE buyers have also been eyeing fiber assets, as demonstrated by funds affiliated with Apollo Global Management (APO) acquiring Lumen Technologies' copper and fiber network in 20 states for $7.5 billion. Similarly, Searchlight Capital Partners and Canadian institutional investor British Columbia Investment Management recently partnered to take Consolidated Communications Holdings (CNSL) private for about $3.1 billion.

Frontier carries a substantial amount of debt on its balance sheet but owns valuable telecom assets that can serve as collateral for borrowing. Additionally, any potential transaction would require the approval of large shareholders, including Ares Management (ARES) and Cerberus Capital Management.

Despite hurdles, the news of potential interest in Frontier reinforces Wolfe Research's belief that the company's existing fiber asset value is undervalued. Peter Supino of Wolfe Research rates Frontier stock at Outperform with a $27 price target.

While there are challenges and uncertainties surrounding a potential deal, testing the market could prove beneficial.