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Windstream to spin off network assets into real estate trust

story by Roby Brock, a TCW content partner and owner of Talk Business & Politics
roby@talkbusiness.net

Little Rock-based Windstream Corp. will spin off certain assets of the telecom and broadband company and form a new, real estate investment trust (REIT).

The company announced on Tuesday (July 29) that it would form an independent, publicly traded REIT that will own Windstream’s existing fiber and copper network and other fixed assets. In turn, Windstream will lease the network and those assets from the new company — which has yet to be named — for $650 million annually.

The move is expected to reduce Windstream’s debt, increase its cash flow, and potentially position the company for acquisitions. Windstream said it anticipates that the spinoff would occur in the first quarter of 2015.

“This transaction will make Windstream a more nimble competitor in today’s increasingly dynamic communications marketplace and accelerate our deployment of advanced communications services,” said Jeff Gardner, president and CEO of Windstream. “Additionally, the REIT will have geographically diverse, high-quality assets and sustainable cash flows with the ability to grow and diversify over time.”

A REIT is a company that owns and/or operates income-producing real estate. They are often used in commercial real estate transactions and timberland holdings, but can be used in other ways. In 2011, Little Rock department store chain Dillard’s spun off a portion of its real estate assets into a REIT.

LEADERSHIP

Windstream CFO Tony Thomas will serve as CEO of the REIT, which will have approximately 25 employees. Francis “Skip” Frantz, a Windstream director, will serve as chairman of the REIT’s board and will leave Windstream’s board of directors at the conclusion of the transaction.

“Tony has served Windstream well, and I would like to personally offer my gratitude for his many contributions over the last eight years,” Gardner said. “I am confident that his experience and expertise will benefit the REIT while also providing important continuity and fostering a close working relationship between the two companies.”

Thomas was appointed CFO in 2009. He previously served as controller for Windstream. He will continue to serve in his current role with Windstream while the company conducts a search for his successor.

Frantz has been a director of Windstream since 2006 and was chairman of the board from July 2006 to February 2010. He is a former chairman of the United States Telecom Association and was previously executive vice president of external affairs, general counsel and secretary of Alltel Corp.

DETAILS
Under the transaction, Windstream will spin off certain assets, including its fiber and copper networks and other real estate, as a REIT, which will lease use of the assets to Windstream through a long-term triple-net exclusive lease with an initial estimated rent payment of $650 million per year.

Company officials said they engaged an accounting firm to perform an independent valuation of its real estate assets to be transferred to establish a fair market price for rental of the assets.

Windstream will still operate and maintain the assets and deliver services to consumers and businesses. The company said customers will see no change in their rates, scope or terms of service as a result of the transaction. It also said it will continue to have sole responsibility for meeting its existing regulatory obligations following the creation of the REIT. The REIT will focus on expanding and diversifying its assets and tenants through future acquisitions.

The spinoff is expected to be tax-free. Windstream has received a private letter ruling from the IRS related to certain tax matters regarding the tax-free nature of the spinoff and has qualified for the status.

Windstream anticipates that the REIT will raise approximately $3.5 billion in new debt, which will be used to repay existing Windstream debt to effect the transaction. Windstream said it expects to retire approximately $3.2 billion of debt as part of the transaction, resulting in the company deleveraging to 3.3 times debt to adjusted operating income before depreciation and amortization immediately at closing.

“The company’s enhanced leverage profile and improved discretionary free cash flow will enable Windstream to invest more capital in strategic initiatives, better positioning Windstream for long-term growth,” the company said in a statement.

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SHAREHOLDERS AND DIVIDENDS
Windstream, known for its high-paying and consistent dividends, said the transaction will benefit shareholders. Windstream shareholders will retain their existing shares and receive shares in the REIT commensurate with their Windstream ownership. Windstream said it plans to maintain its dividend practice through the close of the transaction.

“Following the spinoff, the expected annual dividend per share in the aggregate for the two companies will be $0.70 per current Windstream share, with Windstream expected to pay an annual dividend of $0.10, while the REIT will have an annual dividend equivalent to $0.60,” the company said.

Shares of Windstream (NASDAQ: WIN) were up in pre-market trading activity. The company’s stock closed at $10.46 per share on Monday. It has traded between $7.18 and $10.57 during the last year.

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