Light Reading
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
50%
50%

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."


Our NFV & the Data Center event will dig into how telecom service providers are evolving their data center strategies. Check it out and register here on Light Reading.


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

(7)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View
mhhf1ve
50%
50%
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
50%
50%
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
50%
50%
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
50%
50%
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
50%
50%
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
50%
50%
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
50%
50%
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?
Flash Poll
From The Founder
It's clear to me that the communications industry is divided into two types of people, and only one is living in the real world.
LRTV Interviews
The New Wave of IP + Optical Integration

11|21|14   |   04:29   |   (7) comments


At the Alcatel-Lucent Technology Symposium, Heavy Reading senior analyst Sterling Perrin talks about how SDN has reshaped the discussion around packet and optical integration.
LRTV Huawei Video Resource Center
Huawei Highlights at BBWF 2014

11|20|14   |   3:40   |   (1) comment


Broadband World Forum is one of the world's largest telecoms, media and technology events with over 7,800 senior executives from across the globe converging on Amsterdam every year to identify the Next Big Thing. BBWF is an exciting place to meet the entire industry under one roof and identify the latest in network innovation, service optimization and customer ...
LRTV Huawei Video Resource Center
How Will BCMS Stimulate Margin for Broadband Operators?

11|19|14   |   6:52   |   (0) comments


In BBWF 2014, Liu Shuqing emphasizes the value of FMC 2.0 based full service experience by throwing light on the BCMS solution. The underlying principle of this innovative technique is to create network robustness and driving network from connection oriented to ACE – BAND oriented infrastructure, in which applications, cloud, and user experiences will be an asset ...
LRTV Huawei Video Resource Center
SingleFAN3.0: Better Connected Experience

11|19|14   |   3:06   |   (1) comment


At the BBWF 2014, David Hu, the VP of Huawei Access Network Product Line, talked about the future of access networks – SingleFAN3.0: faster broadband, wider coverage, and smarter connection.
LRTV Interviews
Basil Alwan Interview: The Road to Cloud

11|19|14   |   09:09   |   (0) comments


Alcatel-Lucent's head of IP and Transport talks about the migration towards a web-like networking environment, the impact of the cloud, SDN and NFV, and the yet-to-be-announced FP4 chip.
LRTV Documentaries
FairPoint Makes a Fair Point About Analytics

11|19|14   |   1:56   |   (1) comment


The US-based communication service provider gets to grips with advanced analytics, tackling data and breaking down the silos within its own business.
LRTV Documentaries
Analytics Lets C Spire Get to Know Subs

11|19|14   |   3:01   |   (2) comments


It's all about the data for US operator C Spire as it uses analytics to personalize its customer service down to individual subscribers.
LRTV Interviews
Nuage Branches Out With SDN: CEO Interview

11|17|14   |   9:32   |   (0) comments


Sunil Khandekar, CEO of Alcatel-Lucent's SDN-focused unit Nuage Networks, talks about the opportunities and challenges of breaking out of the data center into wide-area networks.
Light Reedy
Telecom Analytics Grows Up

11|14|14   |   1:15   |   (4) comments


The big data analytics debate has moved on from a year ago, with some experts suggesting it's no longer a technology challenge.
LRTV Huawei Video Resource Center
Huawei Compass

11|14|14   |   3:17   |   (1) comment


At OpenStack Summit 2014, Shuo Yang, Huawei Principal Cloud Infrastructure Architect introduced Huawei Compass, the software tool for solving customers' problems on the journey of OpenStack Cloud.
LRTV Huawei Video Resource Center
Huawei's Cloud Strategy in European Region

11|14|14   |   2:56   |   (1) comment


At OpenStack Summit 2014, Dr. Gotz, CTO of Huawei IT in European Region introduced Huawei's cloud strategy in European region.
LRTV Huawei Video Resource Center
Huawei's Contribution on OpenStack

11|14|14   |   5:58   |   (0) comments


At OpenStack Summit 2014, Dennis Gu, Huawei Chief Architect of Cloud Computing introduced the relationship between OpenStack and cloud computing, and Huawei's contribution on OpenStack.
Upcoming Live Events
December 2, 2014, New York City
December 3, 2014, New York City
December 8-10, 2014, Reykjavik, Iceland
February 12, 2015, Atlanta, GA
April 14, 2015, New York City, NY
May 6, 2015, McCormick Convention Center, Chicago, IL
May 13-14, 2015, The Westin Peachtree, Atlanta, GA
June 9-10, 2015, Chicago, IL
Infographics
Irish Telecom outlines the rise of VoIP technology, including its adoption within businesses and their perception of its quality.
Hot Topics
Bell Labs Chief Slams 'Toy' Networks
Robert Clark, 11/19/2014
$38.3M: Ain't That a Kik in the SMS
Sarah Reedy, Senior Editor, 11/20/2014
Do You Have a 2020 Vision?
Dennis Mendyk, Vice President of Research, Heavy Reading, 11/21/2014
The New Wave of IP + Optical Integration
Ray Le Maistre, Editor-in-chief, 11/21/2014
Google, AT&T, BT Unite on Network Data Models
Carol Wilson, Editor-at-large, 11/20/2014
Like Us on Facebook
Twitter Feed