Frenzied stock trading of shares of Frontier Communications began Tuesday as bearish investors placed a record number of bets the company would lose more than a third of its value by August.

Nearly 87,000 “puts” on Frontier changed hands, which is 66 times the monthly average.  This form of derivative trading lets an investor sell stock at a pre-specified, fixed price within a limited time frame, even if the stock price crashes.  These “puts” are comparable to insurance policies, usually sought by investors who believe a stock is about to rapidly decline in value.

Almost all of the volume was generated in two major trades yesterday.  Investors bought July and August puts at the $7.50 level, which suggests at least some investors are betting Frontier stock will decline below that amount.  If it does, they can still sell shares at $7.50.  Frontier fell 17 cents to $7.69 in New York Stock Exchange composite trading Tuesday. It has dropped 1.5 percent so far this year.

Speculation about why the sudden pessimism about Frontier Communications was sprinkled throughout the financial press.

“The motivation for the trades could be outright bearish,” Caitlin Duffy, an equity options analyst at Greenwich, Connecticut-based Interactive Brokers Group told Bloomberg News. “But it could also be someone buying downside protection if they’re long with a large position in Frontier.”

One factor they may be forgetting is the recent completion of Frontier’s acquisition of Verizon landlines in more than a dozen states.  On July 1st, Verizon will spin off its entity New Communications Holdings Inc., created specifically for the tax-free sale, to Frontier.  In effect, Verizon shareholders will suddenly own between 66 and 71 percent of the shares of Frontier and Frontier stockholders will be left with the remaining 29-34 percent.

Should Verizon shareholders decide that Frontier could follow earlier Verizon spinoffs into financial disaster, they’ll want to dump their shares of Frontier stock as fast as possible, causing the share price to plummet.  Those investors buying “puts” may be guessing that is precisely what is about to happen, and they’re hedging their bets.

Frontier Communications filed suit Tuesday against Google claiming the search giant stole its patent for giving users one phone number connecting their home, work and cell phones, the core feature of Google Voice.

Frontier, the independent phone company based in Stamford, Connecticut, claims it holds the patent for allowing a subscriber to “be reached on multiple telephone lines from a single dial-in number.”

“Google’s deliberate infringement of the patent has greatly and irreparably damaged Frontier,” the lawsuit charges.  Frontier is seeking unspecified damages and an injunction to stop the use of the technology.

The lawsuit distracted from Google’s announcement that Google Voice was out of beta and now available to anyone in the United States.  Google Voice lets users obtain a free phone number that will ring multiple telephones and screen calls.

<

p style=”text-align: center;”>

The one number follow-me feature is hardly new to either Google or Frontier.  Phone companies have offered similar features to businesses through telephone products like Centrex since the 1960s.

Frontier filed its lawsuit hours after the U.S. Patent and Trademark Office issued Frontier’s requested patent.

“We believe these claims are entirely without merit, and we’ll defend against them vigorously,” said Google spokesman Andrew Pederson.

Frontier will likely face an uphill battle in its lawsuit, because the company’s patent request from 2007 comes two years after Google Voice’s predecessor, GrandCentral launched service in 2005.  Google acquired GrandCentral in 2007, rebranding it as Google Voice. GrandCentral offered the same “one number” feature Frontier is complaining about two years before the phone company applied for its patent.

Perhaps Frontier’s lawyers might acquaint themselves with the concepts of “prior art” and “first-to-invent.”

Time Warner Cable is back again with another offer to existing Frontier Communications customers trapped in multi-year service agreements.  If you dump your Frontier landline overboard for Time Warner Cable’s Digital Phone service, the cable company will send you a gift card worth $200 good towards defraying your early termination fee, if any.  If you don’t have such a fee, you pocket the $200.  A year ago on this date the company ran a similar promotion heavily promoted in local cable television ad spots.

Time Warner will provide free installation of the phone line including unlimited nationwide long distance for $24.95 a month for 12 months.  With the $200 gift card, that’s above and beyond their usual promotion.  The company is also extending a bundled discount if a customer also takes Road Runner broadband service with their “digital phone” service.

For Frontier customers looking for an early exit, this offers one opportunity.

Existing cable subscribers can take advantage of the offer.  There are terms and conditions to consider, starting with where the offer is available.  The following Time Warner Cable service areas qualify:

• TWC Western New York
• TWC Central New York
• TWC Albany, NY
• TWC New England
• TWC Dothan, AL
• TWC Enterprise, AL
• TWC Yuma, AZ
• TWC El Centro, CA
• TWC Gunnison, CO
• TWC Telluride, CO
• TWC Coeur d’Alene, ID
• TWC Moscow, ID
• TWC Madison, IN
• TWC Newburgh, IN
• TWC Terre Haute, IN
• TWC Ashland, KY
• TWC Owensboro, KY
• TWC Richmond, KY
• TWC Kansas City, MO
• TWC Lincoln, NE
• TWC Ironton, OH
• TWC Richlands, VA
• TWC Pullman, WA
• TWC Clarksburg, WV

Next, the offer is only good for residential customers switching from Frontier’s landline service.  Limit one gift card per customer.  Your final Frontier phone bill showing a disconnect request must be furnished to Time Warner Cable within 30 days to qualify.  Your name and address must match on both bills.  Offer is not available to customers with past due balances with Time Warner Cable, defined as any money owed in the past 30-60 days or customers who have been disconnected for non-payment in the twelve (12) month period preceding this offer.  Service must be ordered by Dec. 31, 2010, and installation must occur within thirty (30) days of order date.

If you’ve contemplated a change in providers but didn’t want to be subjected to a steep early cancellation fee, this isn’t a bad offer.  Although I don’t use Time Warner Cable Digital Phone myself, others in my family do and they are satisfied with the service, although there have been at least two serious outages so far this year that ran several hours.  Since most people also carry a cell phone, any cable outage or power interruption that also takes out your phone line isn’t as serious as it might have been in earlier years.

And, ahem, unlike Time Warner Cable’s attitude towards broadband, they really do provide unlimited calling with their “digital phone” service.

Time Warner Cable is mailing this letter to Frontier Communications customers in the Rochester, N.Y. market. (Click to enlarge)

Goldman Sachs has reviewed the implications of Frontier Communications assuming control of millions of Verizon landline customers, and promptly downgraded their stock to a Neutral rating, telling investors the upcoming consolidation will hasten eroding revenues at Frontier.

“Consolidation of the underperforming acquired assets causes an immediate step-up in revenue erosion for FTR (-6.3% in 2010). In addition, the combined company’s initial EBITDA margins will be significantly below those of legacy FTR (pro forma of 48.0% in 2010, 470 bp below legacy FTR).”

Analysts added, “We expect longer term EBITDA margins of 50%-plus, driven by synergy realization (we forecast $450 mn/year by 2013), and moderating revenue declines, as FTR is able to bring a more localized focus to assets that were not a primary focus inside of a much larger Verizon entity. We forecast 2011/2012 FCF of $950 mn/$921 mn, as synergies and margin expansion only partially offset continued (but moderating) revenue erosion.”

In English, that means Frontier will benefit from its larger customer base in reducing expenses on a per-customer basis, and could become a big enough player to realize some benefits from rolling out services to a larger number of customers nationwide, but those benefits will be tempered by the ongoing loss of revenue as customers dump Frontier landlines for wireless and, where available, switch to a cable modem product to get better speeds and consistent service that Frontier DSL does not provide.  Losing that 5 GB monthly usage allowance won’t hurt either.

Frontier is betting a good deal of the company on expanding broadband service in its largely rural service areas, where many Americans are still stuck relying on dial-up or satellite fraudband, the service that promises a broadband experience but doesn’t come close to actually delivering one.

As long as Frontier doesn’t face competition in its markets, it can deliver 1-3 Mbps DSL service for up to $50 a month and bank those profits as a firewall against ongoing loss of landline revenue.  But if new players arrive, such as LTE wireless, WiMax, cable, or municipal fiber, Frontier’s business plan could go awry in a hurry.

Frontier also continues to pin its hopes on its enormous payout of dividends — sometimes exceeding 12 percent.  The stock is currently the best dividend payer in the S&P 500.  With dependable dividends and the ability to throw back free cash to investors, shareholders can’t ask for anything more.  In the first quarter alone, free cash flow amounted to $152 million and the company paid a dividend to shareholders representing 52 percent of that amount.  That’s $152 million Frontier won’t be spending to upgrade their service or have on hand to pay down debt.

For independent legacy landline providers like Frontier, reducing that dividend could spell disaster for the company’s stock price. Even investors understand this, which is why these kinds of cautionary notes are often attached to coverage about the company:

A cautionary note: telecoms companies with large fixed line exposure generally yield high dividends presently because investors do not believe their revenues and income levels are sustainable as people continue to substitute mobile phones for fixed lines.

The West Virginia Public Service Commission has denied a request from the agency’s Consumer Advocate Division to reconsider the sale of Verizon landlines to Frontier Communications.

The CAD criticized the proposed sale, pointing to earlier failures of similar transactions in Hawaii and northern New England which harmed consumers and businesses in those areas.  The consumer advocate sought a formal independent audit of the deal and increased safeguards to protect service quality and the customers soon to be served by Frontier.

The PSC claimed the CAD didn’t supply any new evidence in its filing justifying a reconsideration of its earlier order approving the sale.  It turned the request down on Monday.

Both Verizon and Frontier had asked the commission to reject the CAD’s request.