By: Maggie McGrath

Looking to invest in its 4G LTE network, wireless carrier AT&T T +1.14% has decided to sell its Connecticut operations to Frontier Communications FTR +0.11%, the companies announced Tuesday morning.

Frontier will receive approximately 415,000 data, 900,000 voice and 180,000 video residential connections of AT&T in Connecticut, as well as AT&T’s local business connections and existing carrier wholesale relationships. This represents about $1.2 billion in annual revenue, or less than 1% of AT&T’s total annual revenues, as of 2013. Frontier is paying AT&T $2 billion in cash for these assets.

For its part, Frontier — which is based in Connecticut and already has a significant presence there — says the deal will be accretive to its cash flow, will improve its dividend payout by more than 5% in the first year, and will provide $200 million in cost synergies by leveraging its existing network and operations.

“We are excited to be acquiring AT&T’s wireline operating company in Connecticut, where our company has been headquartered since 1946. This is a great opportunity to bring to Connecticut Frontier’s portfolio of products and services, such as Frontier Secure, our industry leading digital security offering that gives customers top-rated online computer protection and premium technical support,” Maggie Wilderotter, Frontier chairman and CEO, said in a statement Tuesday morning. ”We see an opportunity to enhance broadband capabilities in Connecticut.”

Added Dan McCarthy, Frontier president and COO, “AT&T’s Connecticut business is substantial, well-defined and covers nearly the entire state. Based upon our track record, we are extremely confident that we will leverage this opportunity to deliver an excellent customer experience and shareholder value.”

The deal is subject to review from the Department of Justice, the Federal Communications Commission (FCC ) as well as Connecticut state regulatory approvals. In a Tuesday morning conference call, Frontier executives predicted this approval would come sometime in the second half of 2014, citing a third-to-fourth quarter 2014 time frame for a deal close. JP Morgan has provided the financing for Frontier.

AT&T said that the transaction will not affect its 2013 financial results, but after the deal closes the financial impacts will be reflected in forward-looking guidance. In a statement, Patricia Jacobs, president of AT&T New England added that from a customer standpoint it will also be business as normal until the deal closes, and that customers can expect the same service as always.

In a note released Tuesday morning, Citi analyst Michael Rollins called the move a “surprise given Frontier’s historical preference to reduce financial leverage over time” but echoed Frontier’s prediction that the deal would be good for Frontier cash flow and dividend growth. Despite these improvements, Rollins reiterated Frontier’s sell rating, writing that “the improvement in [free cash flow] metrics is coming at greater risk to the equity holder vis-à-vis increased financial leverage.”

Rollins also noted that for AT&T, the transaction is small and gross proceeds before tax only represent 40 cents per share. He reiterated Citi’s netural rating on AT&T.

Following the announcement of the deal, shares of AT&T opened at $34.20, a shade higher than Monday’s $34.15 close. Year-to-date, the stock is down 2.43%. Frontier also opened higher than its Monday close — at $4.91 per share — and in early market activity was trading for a 7.7% gain. Year-to-date, Frontier is up just 0.92%.