Verizon (VZ) Enters Tentative Deal With Unions To End Strike

Verizon Communications Inc. (NYSE:VZ) has entered into a tentative deal with two workers’ unions whose members went to strike from Apr 13, 2016. Verizon and the striking unions, The Communications Workers of America (CWA) and International Brotherhood of Electrical Workers (IBEW), have almost resolved their differences and nearly 36,500 workers in the company’s wireline and cable TV (FiOS Internet and TV) segment will resume work from Jun 1, 2016. Union members will vote on the tentative contract by Jun 17.

Verizon and its wireline workers were at a stalemate over a labor contract. The company’s wireline employees have been working out of contract since August last year. Earlier this month, the U.S. Secretary of Labor Thomas Perez met with the Verizon CEO and the heads of the two unions that represent the company’s striking workforce. Perez requested both sides to sit at the negotiation table to resolve the issues.

Under the new contract, Verizon will provide a 10.9% pay rise to its unionized workers over a period of four years, a small increment in pension benefit and a promise to create nearly 1,400 new union jobs. This will include around 1,300 new call center jobs and about 70 wireless retail store employees. Importantly, the company agreed to reduce subcontracting and withdrew a proposal to relocate employees for extended periods. These two were the main issues of the strike.

Though Verizon had to make certain concessions, it stood to gain on some points. The company will be able to reduce benefit costs by modifying employee health-care plans. Verizon stated that it will achieve cost savings through healthcare plan design changes, adopting Medicare Advantage plans for its retirees, maintaining limits on post-retirement healthcare costs, and freezing the mortality table for lump sum pensions using the GATT rate.

Just a week ago, Verizon’s CEO warned that the company’s second-quarter 2016 financial results may be affected by the ongoing strike. Lowell McAdam stated that the company is currently on track with respect to repairing and maintenance issues of the existing installed bases. However, the number of new installations of FiOS high-speed Internet and FiOS pay-TV has dropped significantly. As a result, the company may suffer high-speed broadband and pay-TV customer attrition.

It is crucial for Verizon to ensure smooth operations and continuing service even in the face of a walkout. Cable and landline revenues, although not comprising a large share of the pie, come directly from Verizon’s business customers. In 2015, FiOS generated 29% of Verizon’s total revenue and slightly less than 7% of operating income.

Verizon is already facing severe competitive threat from its telecom rivals, AT&T Inc. (NYSE:T) , T-Mobile US Inc. (NYSE:T) and Sprint Corp. (NYSE:S) , and any disruption in services can prove to be fatal for the company. Therefore, a solution to the labor problem will bode well for the company’s near-term growth. Verizon currently carries a Zacks Rank #3 (Hold).