| Windstream Gobbles Up Another |
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By Charlie Reed (creed@atlantic-acm.com) The wave of local telco consolidation continues. Shortly after announcing an acquisition of NuVox Communications, Windstream announced that it will acquire Iowa Telecom, and that it closed its acquisition of Lexcom. Analysis: The Deal: Windstream will pay $1.1 Billion for Iowa Telecom by offering $269 million in stock, $261 million in cash and repaying $598 million in debt. Windstream will add 256K access lines to the current 3 million access lines, as well as 95K high-speed internet customers and 26K digital TV customers from Iowa, Minnesota and Missouri, along with Iowa Telecom's 15 FCC Advanced Wireless Service licenses and three 700 MHz Band licenses. The deal is expected to generate $35 million in synergies from operational expenses and capital expenditure savings. The Strategy: Windstream's strategy is to expand its customer base in order to be one of the surviving rural super telcos as the market continues to consolidate, and to diversify its revenues (see DATALINE: Windstream Becomes Nouveau via NuVox). The combination of CenturyTel and Embarq created CenturyLink, which together had an estimated $8.3 billion in 2008 revenue, leaving Windstream trailing behind. Through the acquisitions of Iowa Telecom, Lexcom, D and E Communications and NuVox, Windstream has slowly increased its revenue from $3 billion to $4 billion in 2008 on a pro forma basis. RLECs Hold Value: Despite falling revenues due to disconnected local wired phones, rural carriers still have strong value. According to U.S. Telecom Wired and Wireless Sizing and Share: 2009-2014, U.S. business and residential voice revenue is expected to decrease by a compound annual growth rate (CAGR) of -8.2 percent from 2008 to 2014, while the major Rural Local Exchange Carriers (Windstream, CenturyLink, Fairpoint and Frontier) are expected to experience a slightly reduced decline at a CAGR of -7.5 percent. For residential and business DSL, the industry is expected to decline at a CAGR (2008-2014) of -3.4 percent while Rural Local Exchange Carrier (RLEC) revenues from these services are expected to grow at a CAGR (2008-2014) of 5.4 percent. It is particularly expensive for competitive carriers to connect to these rural customers or to establish relationships. Hence, the RLECs are at a particular advantage when implementing new services such as high-speed internet and video. Subsidies: The government provides assistance to Rural Local Exchange Carriers through a number of systems and this is expected to continue. The universal service fund provides revenues for rural carriers, ensuring that they will be able to recuperate the costs of connections. This cushion is expected to include broadband services, enabling rural carriers to seek further subsidies. With Iowa telecom, Windstream will take advantage of certain tax shields and will further expand its possible windfall from the economic stimulus. The CLEC Angle: In addition to rural assets, Iowa telecom offers Windstream an opportunity to further expand its competitive business offering. 16 percent of Iowa Telecom's access lines are through its CLEC. As Windstream adds additional business customers, especially through its NuVox acquisition, it will more easily be able to develop and market business solutions such as faster internet access and IP-VPN. The Bottom Line: Winstream's acquisitions will continue and so will the consolidation of rural carriers in general in 2010. Windstream CEO Jeff Gardner said, "Our whole investment thesis was to grow scale in rural America. I still think there's a great deal of consolidation left with smaller players, where the pressure is the most obvious." The means he has interest in more carriers. Other RLECs such as TDS, Citizens, Cincinnati Bell, FairPoint, or CenturyLink are all buyers or possible targets for acquisitions as are the many hundreds of smaller rural carriers. Windstream had been thought to be looking into FairPoint and its problematic acquisition of Verizon access lines. The challenge for Windstream will be to continue to get financing as it accumulates debt. This latest announcement re: Iowa Telecom caused Fitch Ratings to place it on "Ratings Watch Negative" and for Standard and Poor’s to drop its credit rating deeper into junk territory. In comparison to CenturyTel and FairPoint, however, Windstream has been conservative on acquisition spending. Look for Windstream to continue to be part of the consolidation mix in the coming year.
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