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Windstream's Plan for Paetec

Carol Wilson
8/1/2011
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Windstream Communications Inc. (Nasdaq: WIN)'s acquisition of Paetec Communications Inc. (Nasdaq: PAET), in a stock deal valued at $2.3 billion, combines two rapidly growing companies that are betting big on cloud services. (See Windstream Buys Paetec .)

"Windstream has made eight acquisitions in the past five years or so," says Ed Gubbins, analyst with New Paradigm Resources Group Inc. "Paetec acquired Xeta in February after buying Cavalier last year. So they’ve both been busy. But those acquisitions show that these companies were moving in the same direction -- toward cloud-centric business services -- so that should help their momentum as a unified entity."

Interestingly, Windstream only last week shared its new cloud services strategy with Light Reading, as it finishes the integration of Hosted Solutions. (See Windstream Unwraps Cloud Strategy and Windstream Buys Hosted Solutions.)

As Windstream CEO Jeff Gardner told analysts on the call announcing the deal, the Paetec acquisition advances his firm's move to be more business-focused. The new company will have a 100,000-mile fiber optic network, along with 20 data centers.

"We believe the acquisition makes strategic sense as it would expand Windstream's fiber footprint and enhance its exposure to higher-growth segments such as Ethernet, data centers, wireless backhaul and managed services. Pro forma, business and broadband revenues would account for 70% of Windstream's total revenues, up from 60% currently," wrote Michael Nelson, financial analyst with Mizuho Securities USA Inc. , in a note to clients.

Gardner also told analysts his firm will push hard to complete not just the integration of Windstream and Paetec, but also the still-in-process integration of previous acquisitions by both firms. The ability to manage the multiple integration processes could be the biggest challenge to the new firm, but it won't necessarily sate its appetite for acquisitions.

"Windstream will obviously have its hands full for the next year or so with this acquisition, but I wouldn’t be surprised to see another deal before too long," Gubbins says. "If you look at the network map of the combined company, you can see there’s a lot more they could be doing on the West Coast. And to offer the kind of multi-location cloud-based business services that Windstream wants to offer, they’ll need to grow their presence significantly out west, too."

Gardner declined to discuss future expansion on the analyst call, saying Windstream would spend the next "six to 12 months" focused on integrating Paetec.

By buying Paetec, Windstream pushes into the larger group of carriers with local and national assets, which includes the big two in AT&T and Verizon, CenturyLink and now, Windstream.

— Carol Wilson, Chief Editor, Events, Light Reading

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