Frontier Communications (NASDAQ: FYBR) investors are looking for a risky windfall

Frontier Communications Parent (NASDAQ: FYBR)—a broadband internet provider with a large fiber-optic network—saw its stock surge as much as 38% after the announcement that it would be acquired by wireless giant Verizon Communications (NYSE: VZ) for $38.50 a share. Some of the company’s biggest shareholders are now coming out against the deal and say they want more. 

“We believe Frontier’s enterprise value is at least $26 billion today, 30% higher than the current $20 billion enterprise value ascribed from the Verizon Transaction,” Glendon Capital Management said in a letter to Frontier’s board last month, adding that it would vote against the transaction at an upcoming meeting. The hedge fund—which first obtained Frontier shares in 2021 when they were priced around $25—is the second largest investor in the company with a 10% stake worth nearly $900 million; while it recognized the “strategic merits” of combining with a wireless carrier, Glendon criticized what it said was a rushed process.

“With the current voting deadline on November 13, shareholders are being deprived of this critical opportunity to understand the standalone case for the company,” the hedge fund continued, saying the current deal undervalued Frontier when compared to other telecommunications firms like T-Mobile (NASDAQ: TMUS). “At the current price, Verizon would be walking away with a steal. This simply cannot be allowed.”

Glendon’s objections to the sale are shared by other hedge funds with large stakes in Frontier. Australia-based Cooper Investors—which has 800,000 shares—said the fiber carrier would create the most value for shareholders by remaining a standalone company and argued it was worth 57% to 94% more than the current offer price. Carronade Capital Management, which has two million Frontier shares, said the price of any transaction should be at least $48.60 a share.

“Frontier is unique in its scale and fit with Verizon,” it argued in a letter filed with the Securities and Exchange Commission. “It accelerates the convergence trend in a way that no other acquisition can match. The bottom line is that we believe Verizon needs Frontier more than Frontier needs Verizon…We believe it is likely that Verizon is trying to rush to get the deal approved prior to shareholders realizing how much value they are leaving on the table.”

The three hedge funds, of course, have a vested interest in trying to push for as much money as possible now that they know Verizon wants the asset, as a massive windfall would help their overall returns and blunt the impact of any losses from other investments. Funds offered by Cooper Investors, for example, have mostly lagged benchmarks cited on its website over the past three years. 

Glendon has a mixed track record, with its bet on Frontier already far outperforming other recent ones by rising 100% over the past year. Independence Contract Drilling (OTC: ICDI)—which Glendon last purchased in September—has declined 84% since, while Container Store Group (NYSE: TCS)—which Glendon first purchased last year—is down 73%. Pyxus International has declined 26% since Glendon last expanded its holdings of the distribution company in June, although it’s risen 88% over the past year. Expand Energy (NASDAQ: EXE), Glendon’s second largest portfolio holding, has risen 70% since it first purchased shares in 2021. The hedge fund had a major win with Vistra Corp (NYSE: VST), after the generation company’s shares rose six-fold from when it first started buying in 2020, according to Fintel.

Frontier, for its part, is defending the Verizon transaction and says the agreed price represents a significant premium to pre-announcement targets from many analysts. In a lengthy presentation sent to investors last week, the company took issue with the valuations used by Glendon, Cooper Investors and Carronade Capital; it said that remaining a standalone company would come with many inherent risks. Furthermore, the company warned that Verizon might not return with another offer if voters turn down the deal at the vote next month. 

“The Strategic Review Committee and Board unanimously and unequivocally believe the Verizon transaction is in the best interests of stockholders and recommend stockholders vote in favor of the transaction,” it said.

As shareholders watch the drama unfold, the hedge funds holding out for more are playing a risky game. While a higher price may be squeezed out of Verizon, they could also find themselves pushed back toward the $28 level seen before the deal was announced if it is scuttled. Running fiber optic lines is a great business at the moment, but SpaceX could make the entire industry obsolete as it expands its Starlink satellite internet service and works on faster speeds. For some investors, the safer bet may be to take the money and run.