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Windstream's strategy won't easily translate to other telecom network operators, says a veteran financial analyst.

REIT Bandwagon May Be Small

Carol Wilson
7/31/2014
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Windstream's plan to spin off its physical assets into a REIT prompted widespread speculation Tuesday that other US telecom players might follow suit, and stock prices lifted across the board. (See Is Windstream Boldly Setting a New Trend?.)

But reality has already set in, as it now seems unlikely that many others will be able to duplicate the Windstream move after all.

As a result, stocks for AT&T Inc. (NYSE: T) and CenturyLink Inc. (NYSE: CTL) fell Wednesday, almost to pre-REIT speculation levels, and Verizon shares were actually trading below where they were on Monday. Only Frontier Communications Corp. (NYSE: FTR) still seemed to be maintaining the afterglow of Windstream Communications Inc. (NYSE: WIN)'s news.

And that might not last. Donna Jaegers, senior telecom analyst at D.A. Davidson and a veteran in this space, sees limited expansion of the strategy of spinning off physical network assets into a real estate investment trust, despite the IRS approval of the move.

"I think Windstream will get it done, but it will be interesting to see how the bond market reacts to this," Jaegers points out. "In order for this to work as a tax avoidance scheme, the bond market has to buy into it, and I don't see it as all that appealing."

One reason for the lack of appeal is that not all copper assets are equal and thus might not be sustainable in a 15-year lease such as Windstream will have with its REIT. Investors will look at the value of those networks when committing their money, just as they would evaluate the quality of real estate property in a REIT, Jaegers says.

"People are going to be asking if the economic life of those assets is really 15 years," she says.

Jaegers agrees with the general speculation that it would be much harder for an AT&T or a Verizon to pull off a deal like this because it requires state regulatory approval, and those companies tend to have a bigger footprint in the states in which they operate. They would thus face tighter scrutiny, and likely experience resistance from state officials concerned about tax revenues. Windstream's assets, though, are spread across 23 states, and they are not a dominant force in any one of them.

Even smaller companies wanting to embrace this strategy must have their debt structured in a way so that it is immediately callable, so that money raised by the REIT can be used to pay down the parent company debt without incurring substantial extra costs, Jaegers notes.

Windstream is actually getting a double benefit on the financial side from this deal, as it is not only cutting its federal tax bill but also reducing its overall dividend, from the current $1 a share to about 70 cents, combined, from the two entities that emerge -- namely Windstream, as a services company, and the REIT.

"It's a graceful way for them to cut their dividend," Jaegers says. "I think they will have more free cash flow to put back into the network to stimulate more growth."


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Windstream could still use a stronger West Coast presence than even its Paetec acquisition earned it, the analyst thinks, and will be in a much better position to make acquisitions in that space. Prior to the REIT strategy, the company didn't have a lot of room for additional debt capacity and couldn't really use its stock as currency in most deals. (See Windstream's Plan for Paetec.)

"If they can show a little better growth, their stock becomes a better currency," Jaegers notes. But this means the company has to strongly execute the strategy that CEO Jeff Gardner has laid out, increasing its sales to mid-sized enterprises, especially of cloud services and advanced networking options. (See Windstream Portal Integrates Cloud, Network, Windstream Offers Speedy Virtual Data Center Setup to Enterprises, and Windstream Makes Regional Cloud Play.)

"A lot of this comes down to whether the sales force can be effective and whether you can deliver on the products you are marketing," she concludes.

— Carol Wilson, Editor-at-Large, Light Reading

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mhhf1ve
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mhhf1ve,
User Rank: Light Sabre
8/6/2014 | 4:45:00 PM
Re: That was fast
Windstream is unique for sure... but I wonder if there are any CLECs or cablecos that might try this maneuver out..? Incumbents probably won't be able to pull this off... 

 
danielcawrey
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danielcawrey,
User Rank: Light Sabre
8/2/2014 | 7:22:20 PM
Re: That was fast
These complex real estate deals don't make a lot of sense for AT&T and/or Verizon. There's just not a really justifiable reason for it other than to spin off value.

But most big companies usually keep this kind of stuff in-house. I think that's the best way to do it instead of creating a whole new entity. 
mendyk
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mendyk,
User Rank: Light Sabre
7/31/2014 | 3:51:24 PM
Re: That was fast
Yes -- tax avoidance schemes are almost like snowflakes.
Carol Wilson
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Carol Wilson,
User Rank: Blogger
7/31/2014 | 3:48:11 PM
Re: That was fast
In fairness to Windstream, they didn't intend to start an industry trend. I think the reasons why this won't be widespread are pretty company-specific. 
mendyk
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mendyk,
User Rank: Light Sabre
7/31/2014 | 3:46:28 PM
Re: That was fast
Nah -- sometimes I can hold out for days. It does remind me, though, that our previous insect overlord owner did a similar thing when it carved out its vast holdings of 20th-century media properties to focus on its high-flying events business. Its share price has actually fallen off a bit since that decision, but I'm sure it's only because investors haven't figured out yet how brilliant the move was. 
Carol Wilson
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Carol Wilson,
User Rank: Blogger
7/31/2014 | 3:28:45 PM
Re: That was fast
Wow, you waited almost four hours before saying 'I told you so.' Is that a personal record?
mendyk
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mendyk,
User Rank: Light Sabre
7/31/2014 | 3:21:45 PM
That was fast
Is the wind(stream) already out of the sails on this breakthrough strategy?
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