5 Things Windstream Holdings Wants You to Know
By Investopedia | May 20, 2015
Rural telecom company Windstream Holdings (NASDAQ: WIN) recently completed its huge transformation, spinning off its network assets into the new Communications, Sales and Leasing (NASDAQ: CSAL) entity last month. What remains as Windstream won't pay as high a dividend as it used to, but it does hope to have a better balance sheet in its efforts to keep growing its overall business. Let's look at five comments from Windstream executives during a May 7 conference call to get some more color on what's likely to happen with the company and its offspring in the future.
With the formation of CS&L, Windstream identified a unique opportunity to create a real estate investment trust focused on acquiring and owning telecom distribution systems.
-- CEO Tony Thomas
Windstream's spinoff of CS&L aimed to help the overall company in several ways. By shifting some of its debt to CS&L, Windstream reduced its overall burden by about half, giving it more financial latitude to reinvest in its ongoing operations. As a REIT, CS&L offers some tax advantages to investors, and Windstream held onto 20% of its interest in CS&L in order to provide cash flow for continuing debt reduction. In the end, Windstream hopes that both entities will be able to push forward to grow and do more than they would have done as a single entity.
[Windstream is] making targeted investments where they will have the greatest impact and drive the highest returns. Some of the investment opportunities are what I would describe as low-hanging fruit, where modest investments can significantly increase the capabilities of those existing facilities.
-- Thomas
Windstream has identified three main areas for growth. In the consumer area, Windstream has worked at giving customers faster-speed Internet through its VDSL2+ offering, and the Kinetic Internet television service is also a new way Windstream hopes to cash in on its consumer segment. In serving carriers, Windstream is expanding its long-haul network. The enterprise segment is also important, and there, Windstream expects to focus on high-margin services to raise traffic and reduce costs. Capitalizing on all three of these opportunities could make a big difference for Windstream in the long run.
We are very excited about the opportunities presented by the Connect America Fund, also known as CAF.
-- CFO Bob Gunderman
The federal government has long subsidized the telecom industry to serve customers in remote areas, and the new Connect America Fund program was an FCC initiative to update older programs and ensure access to affordable broadband service. Gunderman noted that Windstream won about $179 million in annual funding offers under CAF Phase 2, and Windstream will have to decide by August which of those offers it will accept. Windstream pointed out that the amount is higher than its current support under the old Universal Service Fund and could help its rural markets notably.
We're going to monitor market conditions and look to find the time that we think, in coordination with our friends at CS&L, is the best time to monetize that stake.
-- Thomas
Although CS&L will pay dividends to Windstream, investors also foresee that Windstream will eventually decide to sell off its remaining stake in the REIT in order to raise more capital to reduce debt. Thomas didn't give specific details on exactly when such a liquidation might occur, but at current prices, the 20% stake in CS&L is worth roughly $800 million. That wouldn't allow Windstream to get rid of all of its debt, but it would take a substantial chunk out of the billions that remain.
In conjunction with the transaction, Windstream amended our credit facility to extend the maturity of our $1.25 billion revolver for five years and improved the interest rate on our borrowings by 25 basis points. Following the transaction, Windstream's unsecured debt rating was upgraded two notches.
-- Gunderman
Windstream has already seen positives from cutting its debt, as interest expenses should fall dramatically as a result of its refinancing transactions and its improved rating. The question, though, is whether Windstream will remain committed to reducing debt or will end up releveraging itself in order to do future acquisitions or take on other major expenses. Either way, though, Windstream still has more flexibility than it did before the CS&L spinoff.
Windstream is in a transition phase, and investors will have to get used to the new division of labor between Windstream and CS&L. In the long run, Windstream might well achieve a lot more as a separate entity than it could have before the spinoff.
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