WindstreamSmall telecom service providers and cable companies could have an “elegant exit strategy” by selling their network assets to the real estate investment trust that Windstream plans to spin off, said Windstream Chief Financial Officer Tony Thomas today. Thomas, who will be the CEO of the REIT when the spin-off is completed, made his comments at the Goldman Sachs Communicopia Conference in New York today. The event was also webcast.

Windstream announced its plan to spin off its network assets into a REIT in late July. Ironically the goal is to free up cash for the company to invest further in its network. The REIT will own the company’s fiber, copper and real estate assets, but the remaining company will operate the network and apparently will own transmission and switching/ routing equipment as Windstream is still talking about collecting Connect America Fund money to help cover the cost of bringing broadband to rural areas.

Rural Telecom Impact
When spin-off plans were announced, Windstream talked about the possibility of pursuing other transactions – and at today’s event Thomas and Windstream CEO Jeff Gardner offered more detail about that possibility.

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After the spin-off, the two companies in some cases will partner on mergers and acquisitions, said Thomas. “We could collaborate to expand the geographic reach of Windstream and grow income per share one to two percent,” he said.

Windstream would be most interested in partnering with the REIT on transactions involving companies with strong enterprise businesses, said Windstream CEO Jeff Gardner at today’s event.

In cases where the REIT would buy a small operator’s network but Windstream was not interested in the transaction, the REIT would acquire the assets and lease use back to the seller, a Windstream spokesman said in an email to Telecompetitor in response to a follow up question from us.

At today’s event, Thomas said selling network assets to the REIT would give small family-owned telcos the opportunity to “take cash out of the business and do some estate planning.”

Large Telco Interest?
As for why other network operators wouldn’t simply create their own REITs, Thomas said some other companies will not be willing or able to go through the effort required to make that move. “Building the talent and team” and putting master lease agreements in place to support the REIT plans took “a tremendous amount of time,” Thomas said.

At least one large carrier – Verizon – has said it has looked at the idea of a REIT spin-off and determined that its circumstances were different from Windstream’s and the move would not make sense.

“When you put [network assets] into a REIT it sort of freezes them,” said Verizon CEO Lowell McAdam when asked about the REIT option at Communicopia yesterday. “I want control and financially it doesn’t look like it would have the same impact for us.”

As an alternative to creating their own REITs, however, Thomas believes some large companies will be interested in selling network assets to the Windstream REIT as a means of freeing up capital for investment. He believes they will “add up all their [investment] needs” and “assess whether they need incremental liquidity.”

He noted that the approach is much like what wireless carriers did when they sold off cell towers to free up money for network builds.

Connect America
Also at today’s Windsteam session, Gardner said there has been considerable misunderstanding about the impact the REIT spin-off will have on Windstream operations. “From an engineering and operations perspective, nothing is changing,” said Gardner. The jobs of Windstream’s front line technicians and engineers will change very little, he said.

Gardner also noted that he expects Windstream to collect more money from Phase II of the Connect America Fund than it currently collects from today’s Universal Service program, which the CAF program will replace. Phase II of the Connect America Fund is scheduled to kick in for price cap carriers this year.

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