Shaking the Tree, Boss

Aug 8, 2014

As I sat down to write this blog on Tuesday afternoon, July 29th, 2014, the US stock market was heading gently downward. However, the most important of industries had virtually all companies – from AT&T and Verizon down to the smallest telco service providers – with stocks next to those lovely, upward-facing green arrows.

What drove this unusual stateside phenomenon? A new, bold financial move by Windstream Holdings to spin off key network assets, namely its fiber and copper network as well as consumer services, into a publicly traded Real Estate Investment Trust (REIT). Many faithful telco shareholders are likely thinking, “thank you, Jeff Gardner and team”.

Windstream emerged from a 2006 spin-off from Alltel Corp, which had merged with 360, then subsequently acquired eight companies on its own. This clearly is a company that does not worry about moving the cheese or upsetting employees with a little (or a lot of) change here and there.

The new move by Windstream that was so well received by The Street forces little operational change, but if approved by regulators, offers significant financial advantages. REITs do not pay federal taxes, distributing 90% of profits to owners, who pay taxes on the income. Cell tower companies have used this model for years, but this spin-off provides a new vision for service providers

This newest change was endorsed by Moody’s Investors Service as a move that will improve cash flows next year by $160 million, and then continue to provide better cash flow than the old, (currently standard for most) structure, in which the network is owned by the service provider. Windstream will raise new debt, use most of the money to pay off existing debt and also invest in better broadband.

Although there are some criticisms of the financial structure concerning future investments in the network or lack of flexibility, there is great speculation about which other companies may see the model as advantageous to their own operations. The stock market pushed those providers with the most rural network the highest, suggesting that Frontier Communications, CenturyLink, Fairpoint Communications, TDS Telecom and others with rural properties may be the first to be nudged in the REIT direction. I would imagine they have received plenty of calls from financial houses offering to help with such a shift. Whether cable companies and the larger and more urban telcos will dive for the tax advantages of this model is a greater unknown.

Kudos to Windstream management for employing an interesting strategy for acquiring broadband investment capital and generating market-wide speculation as to whether its moves will be followed by other carriers spinning off assets into REITs. As the Windstream version is slated to close in the first quarter of 2015, we all have time to watch as industry and Wall Street analysts debate the pluses and minuses of the move, and speculation about potential imitators.

This analysis was originally published at Capacity Magazine.

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