Alltel, Windstream Up After Spinoff
Alltel's stock closed up $0.80 (1.49%) to $54.45 in regular trading Tuesday. (See Alltel Reports Q1.) Valor, which celebrated its 2.9 million new access lines by changing its name to Windstream Communications Inc. (Nasdaq: WIN), saw its stock open at $11.50 and close up $0.52 (4.52%) to $12.02.
With the absorption of Alltel's access lines, Windstream becomes the fifth largest landline carrier in the U.S. with 1.91 percent of the nation's access lines under management. (See Valor, Alltel Wireline Merge.)
Alltel stockholders now collectively own approximately 85 percent of Windstream, while Valor’s stockholders collectively own 15 percent, according to SEC filings. Valor reports that it issued approximately 403 million shares of its stock to Alltel shareholders as part of the payment.
Alltel believes, and the Street apparently agrees, that the separation of its wireless and wireline assets will benefit both businesses. “We really have two different sets of investors,” says Alltel spokesman Andrew Moreau. “Our wireline investors wanted to invest for the dividend, and our wireless investors wanted to invest for the growth potential; so we decided the best way to give everybody what they wanted was to split the businesses.”
Valor says with Windstream it’s “creating the largest telecommunications and entertainment services company focused on serving rural America.” The company offers voice, broadband, and digital TV services in 16 (mainly rural) states and employs some 8,000 people. Valor board members believe the merger will leverage new economies of scale and will improve the company’s profile in the eyes of Wall Street.
Still, Windstream begins life saddled with a lot of debt. As part of the deal, Valor paid a special dividend to Alltel of approximately $2.275 billion. Windstream also assumes $267 million of debt held by the Alltel landline business, according to the shareholder prospectus filed with the Securities and Exchange Commission (SEC) . With the addition of Valor's debt, the new company carries approximately $5.5 billion, according to the prospectus.
Windstream representatives could not be reached for comment by deadline.
Analysts say any move by Alltel must be viewed through the lens of the carrier’s attractiveness as a takeover target. “With the cash that Valor dividended to them they’ll have a very clean balance sheet making them more attractive," says Janco Partners Inc. analyst Donna Jaegers. Jaegers says Alltel already has roaming agreements with Verizon Wireless and Sprint Wireless (NYSE: PCS). “Both of those nationwide carriers might be interested in picking up Alltel at some point.” (See Sprint, Alltel Renew.)
Jaegers, however, doesn’t believe a major acquisition of Alltel will happen immediately. In the nearer term, the sale to Valor might free Alltel up to make its own acquisitions of smaller wireless carriers, she says. Pre-merger, Valor generated revenues of $125.6 million in the three months ended March 31, 2006, and $505.9 million in revenues during 2005.
Of those revenues, 22.8 percent came from state and federal Universal Service Funds (USFs), according to SEC filings. With its new access lines, Windstream may be eligible for even more USF money. Alltel received 5.8 percent of its landline revenues from USF during 2005.
The main risk faced by Windstream now comes from the continuing growth of wireless and broadband services at the expense of wireline.
“In the future, it is expected that the number of access lines served by Windstream will continue to be adversely affected by wireless and broadband substitution and that industry-wide pricing pressure will continue,” the stockholder prospectus reads. “There can be no assurances that Windstream will be able to compete successfully with Alltel or other wireless carriers.”
Windstream has 55 retail stores and operates a directory publishing and communications product supply business.
The company's broadband service, which features speeds of up to 6 Mbit/s, will be available to approximately 80 percent of the company's customers by the end of 2006.
Both Alltel and Windstream are headquartered in Little Rock, Ark.
— Mark Sullivan, Reporter, Light Reading