Windstream Makes Changes to REIT Spinoff

By Josh Long

Windstream on Thursday provided additional details on plans to spin off its telecommunications network assets into a real estate investment trust (REIT).

The Little Rock, Arkansas-based company said it is “refining” the agreement and now anticipates retaining nearly 20 percent of shares in the REIT and distributing the remaining 80 percent to stockholders. Following the spinoff, Windstream will sell shares in the REIT over a 12-month period and use the proceeds to retire debt, according to a press release.

Windstream announced it will hold a special meeting of stockholders on Feb. 20, 2015, in conjunction with the spinoff to approve a one-for-six reverse stock split. During the meeting, stockholders also will consider a move to facilitate the conversation of Windstream Corporation into a limited liability company. Without the conversion to an LLC, the company said, the spinoff would trigger a tax liability of approximately $600 million to $800 million.

In July, Windstream announced an agreement to spin off its telecom network assets into an independent, publicly traded REIT under a tax-free transaction that the company said will enable it to lower debt and boost cash flow. The REIT will lease assets to Windstream through a long-term triple-net exclusive lease with an estimated rent payment of $650 million annually.

Windstream said the “refined structure” will enable the company to reduce its debt by $4 billion. That is up to from its initial estimate of $3.2 billion. In July, the company said it anticipated that the REIT would raise around $3.5 billion in new debt, which would be used to repay Windstream debt in order to consummate the transaction.

In a regulatory filing last month, Windstream said it anticipated the spinoff would potentially enable the company “to accelerate broadband investments, transition faster to an IP network or pursue additional growth opportunities to better serve customers.”

Windstream anticipates completing the spinoff in the first quarter of 2015.

“Given the importance of the REIT formation to Windstream’s future performance, the board of directors and I are intently focused on completing the spinoff, and it remains a strategic priority,” President and CEO Tony Thomas said in a statement. “This refined structure allows Windstream to reach our leverage goals faster to strengthen our competitive position, which we believe is appropriate and prudent given the fast changing telecom industry and rapidly evolving customer needs.”

Ahead of the REIT, Windstream last week announced several management changes. The most significant personnel announcement was the naming of the 43-year-old Thomas as president and CEO. Thomas served as chief financial officer for the company from August 2009 through September 2014. He was instrumental in developing Windstream’s REIT spinoff strategy, according to the company.

Jeff Gardner, Thomas’ predecessor, will remain with Windstream as a senior advisor to the CEO and a member of the board of directors through Feb. 1, 2015.

Thomas leads a company that continues to focus on transitioning its sales from traditional voice services to consumer broadband and business services. In the nine-month period that ended on Sept. 30, 2014, consumer broadband and business services revenues comprised almost 73 percent of total revenues. Overall, Windstream’s revenues have been falling.

Through the first nine months of the year, revenues declined to approximately $4.4 billion from $4.5 billion. The third quarter was no exception as revenues and sales ($1.46 billion) fell almost 3 percent from the same period a year earlier.

In connection with the REIT, Windstream said it has received a favorable private letter ruling from the Internal Revenue Service and has obtained most of the regulatory approvals required from state commissions.

REITs have attracted the attention of at least one other large telecom provider: Verizon. During an investor conference over the summer, Fran Shammo, Verizon’s chief financial officer, said the company had examined a REIT.

“[Verizon] has looked into moving its copper and fiber assets into a REIT structure, but Mr. Shammo noted the process is more complex for [Verizon] and it would also prevent them from divesting its copper assets down the road,” said Timothy Horan, an Oppenheimer analyst, in a research report following Shammo’s talk.

Horan indicated he predicts Verizon will wait to see how Windstream’s REIT trades publicly before making any decisions.

Wall Street isn’t exactly fired up about Windstream’s REIT update. On a day when the Dow is up nearly 300 points, Windstream’s stock is down nearly 2 percent as of 2:11 p.m. ET.