Verizon Communications has announced a $20 billion all-cash acquisition of Frontier Communications, aiming to expand its fiber footprint across the U.S., with the deal expected to close in about 18 months.

Verizon Chairman and CEO Hans Vestberg emphasized that this acquisition is strategically aligned to enhance competitive capabilities and broaden premium service offerings.

Frontier has faced significant financial challenges, including a Chapter 11 bankruptcy filing in 2020, and has been urged by activist investor Jana Partners to improve its business performance.

Following the acquisition announcement, Frontier's stock initially surged nearly 39% but later fell over 9% in pre-market trading, dropping below Verizon's offer price.

Verizon's wireless revenue growth has slowed, with only about 3% growth in 2023, highlighting the need for diversification in revenue sources.

Frontier's recent history includes legal challenges, such as a 2021 FTC lawsuit for misrepresenting internet speeds, which resulted in a settlement.

The acquisition has received unanimous approval from the boards of both companies and is subject to customary closing conditions.

Verizon's stock is currently trading at about nine times the consensus 2024 earnings, which is considered reasonable, alongside a forward dividend yield of over 6%.

Despite the acquisition plans, Verizon has reaffirmed its full-year guidance, projecting adjusted EPS of $4.50 to $4.70 and wireless service revenue growth of 2% to 3.5%.

Acquiring Frontier could provide Verizon with a quicker solution to enhance its network compared to building its own infrastructure from scratch.

Sowmyanarayan Sampath, CEO of Verizon's consumer group, noted that owning the fiber business is crucial for reducing customer churn and ensuring long-term sustainability.

The acquisition follows a significant cyberattack on Frontier in March that exposed personal data for approximately 750,000 customers.