WindstreamWindstream announced today their intention to spin off many of their network assets into a separate publicly traded real estate investment trust (REIT). The separate company will own Windstream’s existing fiber and copper networks, as well as other real estate assets. The transaction will allow Windstream to lower their debt by about $3.2 billion and presumably free up more cash for network and service enhancements.

“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.”

Windstream REIT Spin-Off
The tax-free spin-off will create a new company that will lease network assets back to Windstream at an initial estimated annual payment of $650 million. Windstream maintains its customer relationships and regulatory obligations. Windstream’s current CFO Tony Thomas will serve as the new company’s CEO. The new company will initially have about 25 employees.

“They are separating the low growth, capital intensive network operations from the higher growth communications and technology solutions business,” said Bill King, president of JSI Capital Advisors, an investment bank focused on the telecommunications industry, in an email interview. “This allows the market to value the network assets on a yield basis and the solutions business as a growth asset.”

There are additional financial motivations behind this transaction says Michael J. Balhoff, CFA, a senior partner at telecom strategic advisory firm Charlesmead Advisors, LLC. “The straightforward motive for the spinoff is to preserve cash that might otherwise be paid out in taxes,” said Balhoff in an email interview.

This is not a new concept. It’s a strategy that’s been debated in the past. More recently wireless tower companies have been very active with this strategy.

“It’s a throw back to the old structural separation model that had previously been vehemently opposed to by the likes of Verizon and AT&T. I find it interesting that the IRS acquiesced to the network assets being classified as real estate,” said King. “It will be interesting to see how long it takes for the REIT to start leasing capacity to others other than WIN. It will also be interesting to see how the dynamics between WIN ( and later others) and the REIT to make the improvements necessary for next generation services.”

Windstream says the transaction will allow them to enhance their broadband offers. The company said it would expand availability of 10 Mbps Internet service to more than 80 percent of its customers by 2018. It also said it would more than double the availability of 24 Mbps Internet service by 2018, expanding to more than 30 percent of its customers. “We assume that this tax-efficient approach provides Windstream with more flexibility to operate its business, which necessarily includes investment in broadband and data services,” said Balhoff. “We believe that Windstream understands the importance of ongoing investments, and likely sees this as an enabling strategy.”

The transaction presumably allows the REIT to pursue other transactions as well. “The REIT will focus on expanding and diversifying its assets and tenants through future acquisitions,” said Windstream in a press release announcing the transaction. Windstream has been quite active with M&A in the past few years and this transaction may better position them for additional deals in the future.

“I think it is a creative financial solution and a recognition that there is no other obvious way to monetize legacy wireline assets. I think it will shift the focus of WIN from an infrastructure provider to a solutions provider with a much more focused “sales” culture,” says King.

Will we see more carriers follow this strategy?

“The response of investors in the market today, in the wake of the announcement, tells you that they expect other carriers to investigate this approach,” said Balhoff.

King added, “I definitely think you could see Verizon, CenturyLink and AT&T doing this as well.”

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