America Online 2015 Annual Report Download - page 12

Management’s Discussion and Analysis
ofFinancialCondition and Results of Operations
Overview
Verizon Communications Inc. (Verizon or the Company) is a holding
company that, acting through its subsidiaries, is one of the world’s
leading providers of communications, information and entertainment
products and services to consumers, businesses and governmental
agencies. With a presence around the world, we offer voice, data and
video services and solutions on our wireless and wireline networks
that are designed to meet customers’ demand for mobility, reliable
network connectivity, security and control. We have two reportable
segments, Wireless and Wireline. Our wireless business, operating
as Verizon Wireless, provides voice and data services and equipment
sales across the United States (U.S.) using one of the most extensive
and reliable wireless networks. Our wireline business provides
consumer, business and government customers with communications
products and enhanced services, including broadband data and
video, corporate networking solutions, data center and cloud services,
security and managed network services and local and long distance
voice services, and also owns and operates one of the most expansive
end-to-end global Internet Protocol (IP) networks. We have a highly
skilled, diverse and dedicated workforce of approximately 177,700
employees as of December31, 2015.
To compete effectively in today’s dynamic marketplace, we are
focused on transforming around the capabilities of our high-
performing networks with a goal of future growth based on delivering
what customers want and need in the new digital world. Our three tier
strategy is to lead at the network connectivity level in the markets we
serve, develop new business models through global platforms in video
and Internet of Things (IoT) and create certain opportunities in applica-
tions and content for incremental monetization. Our strategy requires
significant capital investments primarily to acquire wireless spectrum,
put the spectrum into service, provide additional capacity for growth
in our networks, invest in the fiber optic network that supports our
businesses, maintain our networks and develop and maintain sig-
nificant advanced information technology systems and data system
capabilities. We believe that steady and consistent investments in our
networks and platforms will drive innovative products and services
and fuel our growth. Our network leadership will continue to be the
hallmark of our brand, and provide the fundamental strength at the
connectivity, platform and solutions layers upon which we build our
competitive advantage.
Strategic Transactions
Spectrum Auction
In January 2015, the Federal Communications Commission (FCC)
completed an auction of 65 MHz of spectrum in the Advanced
Wireless Services (AWS)-3 band. We participated in that auction and
were the high bidder on 181 spectrum licenses, for which we paid cash
of approximately $10.4billion. The FCC granted us these spectrum
licenses in April 2015.
Acquisition of AOL Inc.
On May12, 2015, we entered into an Agreement and Plan of Merger
(the Merger Agreement) with AOL Inc. (AOL) pursuant to which we
commenced a tender offer to acquire all of the outstanding shares of
common stock of AOL at a price of $50.00 per share, net to the seller
in cash, without interest and less any applicable withholding taxes. On
June23, 2015, we completed the tender offer and merger, and AOL
became a wholly-owned subsidiary of Verizon. The aggregate cash
consideration paid by Verizon at the closing of these transactions
was approximately $3.8billion. Holders of approximately 6.6million
shares exercised appraisal rights under Delaware law. If they had
not exercised these rights, Verizon would have paid an additional
$330million for such shares at the closing.
AOL is a leader in the digital content and advertising platform space.
Verizon has been investing in emerging technology that taps into the
market shift to digital content and advertising. AOL’s business model
aligns with this approach, and we believe that its combination of owned
and operated content properties plus a digital advertising platform
enhances our ability to further develop future revenue streams.
See Note2 to the consolidated financial statements for additional
information.
Access Line Sale
On February5, 2015, we announced that we have entered into a defin-
itive agreement with Frontier Communications Corporation (Frontier)
pursuant to which Verizon will sell its local exchange business and
related landline activities in California, Florida and Texas, including
Fios Internet and video customers, switched and special access lines
and high-speed Internet service and long distance voice accounts
in these three states for approximately $10.5billion (approximately
$7.5billion net of income taxes), subject to certain adjustments and
including the assumption of $0.6billion of indebtedness from Verizon
by Frontier. The transaction, which includes the acquisition by Frontier
of the equity interests of Verizon’s incumbent local exchange carriers
(ILECs) in California, Florida and Texas, does not involve any assets
or liabilities of Verizon Wireless. The assets and liabilities that will be
sold are currently included in Verizon’s continuing operations and
classified as assets held for sale and liabilities related to assets held for
sale on our consolidated balance sheet as of December31, 2015. The
transaction is subject to the satisfaction of certain closing conditions
including, among others, receipt of federal approvals from the FCC and
the antitrust authorities and state regulatory approvals. All federal and
state regulatory approvals have been obtained. We expect this trans-
action to close at the end of the first quarter of 2016.
Based on the number of voice connections and Fios Internet and video
subscribers, respectively, as of December31, 2015, the transaction will
result in Frontier acquiring approximately 3.4million voice connections,
1.6million Fios Internet subscribers, 1.2million Fios video subscribers
and the related ILEC businesses from Verizon.
Tower Monetization Transaction
During March 2015, we completed a transaction with American Tower
Corporation (American Tower) pursuant to which American Tower
acquired the exclusive rights to lease and operate approximately
11,300 of our wireless towers for an upfront payment of $5.0billion
(the Tower Monetization Transaction). Under the terms of the leases,
American Tower has exclusive rights to lease and operate the towers
over an average term of approximately 28 years. As the leases expire,
American Tower has fixed-price purchase options to acquire these
towers based on their anticipated fair market values at the end of
the lease terms. As part of this transaction, we sold 162 towers for
$0.1billion. We have subleased capacity on the towers from American
Tower for a minimum of 10 years at current market rates, with options
to renew. We have accounted for the upfront payment as deferred rent
and as a financing obligation.
10 Verizon Communications Inc. and Subsidiaries