By Lalitya Sastrawinata (lsastrawinata@atlantic-acm.com)

Background:

Earlier this month, Windstream Corp. and NuVox Inc. announced a definitive agreement whereby Windstream would acquire NuVox in a transaction valued at approximately $643 million.  According to Jeff Gardner, president and CEO of Windstream, the transaction significantly advances the company’s “strategy to grow broadband and business revenues.”  Following the successful completion of the acquisition, broadband and business revenues will represent more than half of Windstream’s total revenues.

Analysis:

• Terms of the deal:  Windstream will pay $280M in cash and issue $183M in common shares while assuming approximately $180M in NuVox debt.  Windstream plans to finance the acquisition using existing cash and tapping its revolving credit line.  The acquisition is expected to close in the first half of 2010.
  
  
• NuVox profile:  Founded in June 1998, NuVox is a privately-held competitive local exchange carrier (CLEC) with services in 16 states.  The company is headquartered in Greenville, South Carolina.  It delivers enhanced voice, data and security solutions for business customers in the Southeast and Midwest, including VoIP and MPLS networking services. NuVox’s customer base of 90,000 will be a big boost for Windstream’s business services arm, which traditionally has not been the company’s main focus.
  
  
• Generally speaking, wireline-only is a limited business strategy in the long run.  Windstream’s largest source of revenue has long been its traditional wireline business with the smaller cities and rural areas full of loyal customers.  However, demand for wireline has consistently been dwindling, with pressures coming from increasing popularity of both mobile phones and VoIP technologies.  In fact, according to ATLANTIC-ACM’s latest sizing and share analysis (see press release: Wireless Revenues to Eclipse Wireline Revenues by 2014), wireless revenues will catch up to retail wireline revenues by the end of this year.  We also predict that the wireless space will gain another $22B in revenue by 2014.  With telcos and cable providers offering highly attractive wireless plans (prompting some consumers to switch to a wireless-only lifestyle), reliance upon a wireline-only business strategy is becoming increasingly problematic in terms of growth opportunities.  Windstream needs to tap another revenue stream, and acquiring NuVox will help it achieve this key strategic goal. 
  
  
• The business sector will generate revenue growth opportunities.  Compared to the residential segment, business services represent a higher margin group of products.  Businesses purchase services in larger volumes and thus higher prices than their consumer counterparts.  NuVox’s product offerings will allow Windstream to be less reliant on consumers, who tend to be more prone to spending changes as a result of the economy.

The Bottom Line:

This acquisition falls neatly within current trends of rural telcos buying up smaller players to diversify their businesses to remain competitive in the market.  The expanded product portfolio that comes with Windstream’s acquisition will increase the size of its addressable market.  As a cautionary statement, Windstream’s May acquisition of D&E Communications may complicate integration efforts and, as with all acquisitions, success will boil down to execution.  However, ATLANTIC-ACM believes that Windstream's moves are strategically sound and it has the potential to reap the benefits of its acquisitions.