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Dear Mr. Berko:

G.D., Durham, N.C.

Dear G.D.:

Frontier Communications Corp. (FTR-$7.20) has 5,600 employees who help provide telecommunications services (Internet, data, long-distance phone, TV, wireless services, Yellow Pages, etc.) to 2.8 million rural and suburban customers in 24 states. That number will be increasing soon. Earlier this year, FTR agreed to purchase 4.8 million access lines (spread across 14 states) from Verizon for $8.6 billion. FTR will pay Verizon $5.25 billion in shares of its common stock and assume $3.3 billion of Verizon’s debt.

This deal, which should be finalized in the coming 12 months, makes excellent sense. Frontier will control more than 7 million access lines in 27 states and in the process become the country’s largest rural communications provider. This purchase will triple the size of FTR, and Verizon shareholders will then own about 65 percent of a now larger Frontier Communications.

This purchase will provide FTR with revenue opportunities exceeding its dreams. Growth will be supported by significant broadband penetration, plus more revenue from bundled service packages to small businesses and consumers.

A critical consideration is the cash flow necessary to support Frontier’s higher debt load and its dividend. The good news is that the company’s debt load will shrink considerably relative to its soon-to-be-higher cash flow. But the bad news is that FTR will lower its $1 dividend to 75 cents when the acquisition is complete. This gives Frontier more bucks to spend to improve its network and expand its broadband business. But it also reduces your expected yield to 10.4 percent from 13.9 percent. However, that’s not a bad price to pay if the shares trade in the $12 to $14 range in three to four years as some analysts expect.

Fortunately, FTR’s management may be among the best in the business, and the company may be one of the most efficient carriers in the industry. FTR’s net profit margins exceed 11 percent, and it provides a 35 percent return on shareholders’ equity, compared with Verizon’s numbers of 6.7 percent and 13 percent, respectively.

Although FTR’s phone revenues are certain to decline (slowly), 42 percent of its residential phone customers currently subscribe to its very profitable high-speed Internet services, and that number is growing. About 20 percent of the new Verizon customers subscribe to Internet services and the company will, persuasively, encourage more of them to become Internet users.

This year’s revenues of $2.1 billion will grow to $5 billion when the Verizon purchase becomes final. Net income should begin to spike in the next 18 months.

I don’t consider this a widows-and-orphans stock, but I would not have any problem owning 500 shares in an aggressive growth and income portfolio.