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cnwedit
cnwedit
7/29/2014 | 6:02:52 PM
Re: Magic
Brookseven,

I think that's why Jeff Gardner is willing to do this - he sees the future in the cloud services and other things Windstream can sell to businesses. Moving the copper and fiber distribution into a separate subsidiary creates a different business model for the services arm.

I'm leaving the tax discussion alone, given what I know is what I've read elsewhere. 

But one of the reasons I wouldnt' be surprised to see others take this approach is that Windstream has also blazed the trail with the IRS, getting physical network assets declared REIT-eligible.

 

Carol 
brooks7
brooks7
7/29/2014 | 5:34:41 PM
Re: Magic
Carol,

The REIT can only defer the tax for the money that the REIT earns.  That money comes from the other part of Windstream...which of course means that the tax savings from it are not really meaningful.  The implication would have to be that all the profit from Windstream Services would pass through to the network.  Seems very illogical.

 

It seems much more likely to me that somebody read your AWS chart the other day.  Hard to build a Cloud company and have a network apparently.  Really I think the reason is that you can't invest in both at the same time as they have a different model.  Note:  ALL those companies on your chart write their own software.

Separately, the two different companies have completely different valuation models.  The REIT part of the company is valued as Assets + Income (very very low PE).  The Cloud part of the company wants to be valued as a High Tech Firm.  If you think you can make a great Cloud company than your REIT bit is going to crush your stock price in the market.

seven
cnwedit
cnwedit
7/29/2014 | 4:01:30 PM
Re: Magic
Good point, and one I should have stressed in the story. I'd read the WSJ piece which basically compares this to the inversion deals that pharmaceutical companies are attempting. 

But the structural separation angle isn't someting I'd completely dismiss. 

As for how the stock performs, we'll see. At other places where this was done - not the U.S. - the services operation has fared pretty well. 

 
mendyk
mendyk
7/29/2014 | 3:53:43 PM
Re: Magic
Thanks, James -- that takes some of the "we're doing it for the kids" veneer that Windstream is pushing out.
James_B_Crawshaw
James_B_Crawshaw
7/29/2014 | 3:44:38 PM
Re: Magic
They are not doing this because separating the service business from the network assets makes strategic sense. They are doing it to avoid paying corporation tax. Putting the network into a REIT vehicle means it avoids paying corporate tax as long as it pays out 90% of income as dividends. I think you will find that after they do the split the REIT is valued much more highly than the service operation that is left. With large fixed leasing costs and no assets to speak of I know where I'd rather put my money ...
jayja
jayja
7/29/2014 | 3:35:18 PM
The rubber hits the road
OK, people have talked about structural separation as a solution for the US Telecoms industry since the Clinton administration.  Now we'll know:  let's find out.
cnwedit
cnwedit
7/29/2014 | 3:20:08 PM
Re: Magic
I'm not sure I see this as an investment gimmick, but we'll see how it plays out. I think there is a rational argument for having one company focused on the pipes and another focused on the services. 

How well they execute the strategy will determine whether they succeed at either option -- a short-term move to please investors or what I think, a longer term strategic play. 

 
mendyk
mendyk
7/29/2014 | 3:02:30 PM
Re: Magic
As you suggest, it's a variation on a well-worn theme that corporate executives have played and played to extract or unlock "hidden value" -- the real goal is to boost share prices. But companies that do this always have to pretend there are other motives.
cnwedit
cnwedit
7/29/2014 | 2:29:28 PM
Re: Magic
Sorry, not following the feathers-on-a-dog analogy. Are you calling the REIT a false bird or the parent company?

This is actual structural separation process is not a new idea but this is a new way of going about it. It's actually a pretty rational way to do things. You don't agree?
mendyk
mendyk
7/29/2014 | 2:12:54 PM
Magic
If you stick feathers on a dog and call it a falcon, will it fly?
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