Analysis of Windstream / PAETEC Deal

By Aaron Blazar (This email address is being protected from spambots. You need JavaScript enabled to view it.)


Today, Windstream announced plans to acquire PAETEC for $891 million in stock plus the assumption of $1.4 billion in debt.  The move positions Windstream as the fourth largest wireline telecom business services provider in the U.S.


If completed, this deal will help to accomplish several important objectives for Windstream as it continues to dive deeper into the business services market.  The acquisition brings added scale to Windstream's business services channel, adds depth to its business product portfolio and, most importantly, grows its long haul and metro U.S. fiber footprint.

  • Scale: First and foremost, Windstream's acquisition of PAETEC quickly scales up its business services customer base and its sales force by acquiring a battle-hardened, well-respected business services team. ATLANTIC-ACM estimates that Windstream currently holds a 2.1-perent share of the $65.8 billion dollar U.S. Wireline Business Telecom market. The addition of PAETEC will drive that share to 4.2 percent, making Windstream the fourth largest business wireline services provider behind AT&T, Verizon, and Centurylink. Further, the addition of PAETEC delivers a deep sales force with experience selling across a wide range of customer sizes and types. Whereas Windstream's previous acquisitions focused on additions of niche players (i.e. NuVox added a strong presence in the small business market, KDL added a strong presence in the wholesale fiber market and Hosted Solutions added a presence in the managed data center market), this deal meets its need for the development of a broad sales channel capable of serving all types of business and wholesale customers, positioning the company in a premier position among the largest players in the U.S.

  • Scope: Second, the acquisition actively enhances Windstream's product portfolio by adding a deep base of next generation, IP-centric products for businesses of all sizes.
    ATLANTIC-ACM expects industry Business IP and Ethernet revenues to grow from $20.5 billion in 2010 to $28.0 billion by 2016, representing a compound annual growth rate (CAGR) of 4.8 percent. ATLANTIC-ACM expects these products to be the core drivers of business data networking services growth from 2010 to 2016. PAETEC holds a deep base of business VPN, Ethernet, VoIP and advanced IP solutions products that will directly add to Windstream's current business product portfolio. Based on ATLANTIC-ACM's 2011 Business Connectivity Report Card, PAETEC received best-in-class scores for Voice Quality, which included top ratings for VoIP product quality, and VoIP product price competitiveness. The combination of the two companies' product portfolios will position the new company well to continue to gain share in growth product markets.

  • Network Synergies: Most importantly, the planned acquisition gives Windstream deep network coverage of the eastern half of the U.S., as well as network entry into the western half of the U.S., opening up greater opportunities for new sales and network synergies via a nationwide network presence. PAETEC's network assets include a deep set of regional and metro fiber assets through the acquisitions of McLeod and Cavalier (namely the Intellfiber network, which includes a strong set of low-latency offerings between New York, Chicago and Northern Virginia). On the wholesale side, the new company's deeper on-net fiber footprint will allow more penetration of the wholesale wireless backhaul and data center connectivity space. Finally, the combined network also will drive cost synergies across both the PAETEC and Windstream customer bases. For instance, Windstream's recent acquisition of data center provider Hosted Solutions included a Boston data center. With the PAETEC acquisition, Windstream will now have fiber in the vicinity of this center, cutting the costs of providing connectivity. The acquisition of PAETEC effectively in-houses some fiber connectivity needs, allowing Windstream to cut network costs and gain greater control of connectivity between facilities. Most importantly, the increased reach of the combined company's assets will allow it to actively compete at a higher level in the business services and wholesale services markets.

The Bottom Line:

Windstream's acquisition of PAETEC holds a great deal of promise for future potential growth as the fully-scaled player will hold a deep product portfolio and network presence.  If Windstream is able to effectively complete the integration of PAETEC, look for competition to ramp up significantly in the business services spaces as the combined provider seeks to emerge as a strong competitive player selling networking solutions to companies ranging from small businesses to Fortune 100 corporations.

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