Windstream BusinessWhen Windstream just over 18 months ago announced plans to spin off its copper and fiber assets into a real estate investment trust (REIT), a key goal was to free up money for network investment – and now that seven months have passed since the spin-off was completed, the company has indeed been able to achieve that goal, said Windstream Chief Financial Officer Bob Gunderman at a financial conference yesterday. Gunderman made his comments in a question-and-answer session at the 2015 Leveraged Finance Conference in Boca Raton, Florida, which was also webcast.

Windstream REIT Spin-Off Results
As a result of the REIT spin-off, Windstream has paid off 40% of its debt, thereby reducing its interest expense, Gunderman explained. The spin-off also enabled Windstream to reduce its dividend obligation by shifting some of that obligation to the spin-off company — Communications Sales and Leasing (CSAL).

Both of these moves reduced Windstream’s ongoing cash outflow – and although that reduction was offset, in part, by an annual lease payment the company must make to CSAL, Gunderman said the after-tax impact was to increase free cash flow, thereby enabling the company to make improvements to its network. As a result of those improvements, he said the company will be able to “stabilize EBITDA streams” and has put itself in a “position to grow.”

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Gunderman downplayed two key concerns that some industry stakeholders have made about the company’s REIT strategy. One concern is that is that the company has lost control of its network assets. The other concern is that the company’s lease agreement calls for fixed annual payments, when a variable approach might be more appropriate considering that the company’s traditional landline telecom business is likely to continue to erode.

As for the first concern, Gunderman noted that Windstream’s lease agreement with CSAL calls for Windstream to have exclusive use of the spun-off network assets for up to 35 years. “It’s not dissimilar to the IRU [indefeasible right of use] structure that is common in telecom,” Gunderman said. “We view it under that format.”

Windstream’s annual fixed lease payment to CSAL is $650 million, but Gunderman noted that on an after-tax basis, the impact is closer to $400 million.

“We think it’s a very manageable cash outflow,” he said. “Keep in mind Windstream after servicing [its] debt obligation and taxes, is still generating a billion dollars in free cash flow.”

Although not discussed in detail at the conference, it’s also important to note that Windstream retained ownership of network equipment such as switches and routers, only spinning off copper and fiber assets

Unanswered Questions
One of the spin-off goals that has yet to be realized falls on the CSAL side of the spin-off. When the initial plans were announced, Windstream executives said they saw opportunities for other network operators to spin-off their own network assets by transferring them to CSAL. But although executives have said that they have seen strong interest in that possibility, CSAL has not yet announced any such deals.

Another possibility is that some network operators will do their own REIT spin-offs. Some industry observers have said they view that as a strong likelihood if Windstream’s spin-off is relatively problem-free.

And to date, that’s what it seems to have been.

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