Windstream to Spin Off Networks Into Publicly Traded REIT

Windstream Holdings Inc. plans to spin parts of its telecommunications network into a publicly traded real estate investment trust that won’t have to pay federal income tax, an unusual financial transaction that analysts said other phone companies may mimic.

The company’s shares soared, and other telecommunications stocks also climbed. The tax-free separation will let Windstream reduce debt by about $3.2 billion and will help produce about $115 million a year more in free cash flow to invest in broadband, the company said today.

The company will spin off its fiber and copper networks, as well as other real estate, as a REIT, which will lease use of the assets to Windstream with an initial estimated rent payment of $650 million per year. While wireless tower companies such as American Tower Corp. have converted their assets into a REIT, it hasn’t been tried with infrastructure like Windstream’s.

“This is -- I mean, it’s so new,” David Barden, an analyst at Bank of America Corp.’s Merrill Lynch unit, told Windstream executives on a conference call today. “The whole market’s trying to understand this. I mean, are cable companies going to be doing this? Are telecom companies going to be doing this?”

REITs don’t pay federal income taxes with the understanding that they distribute at least 90 percent of taxable earnings to shareholders as dividends. The structure has become a popular tool to improve returns for investors and lower taxes.

The new company, expected to be created by the first quarter of next year, would have the ability to invest in other infrastructure assets, including those owned by other phone companies, Windstream said.

Future Acquisitions?

“The REIT is going to be uniquely positioned to be in a great spot to help unlock value at other companies,” Windstream Chief Financial Officer Tony Thomas, who will be chief executive officer of the new company, said on the conference call. “We have a good understanding of how the REIT opportunity could work in the telecom landscape.”

The REIT, which will have about 25 employees, will raise approximately $3.5 billion in new debt, used to repay existing liabilities. The transaction won’t result in significant operational changes, Windstream said.

Windstream will have a long-term lease with the new company to use its network, and the REIT could also lease capacity to other companies.

Shares Jump

The shares rose 25 percent to $13.15 at 9:30 a.m. in New York. They had advanced 32 percent this year before today.

“This is a very confusing transaction. However, we see this as a positive for WIN shares,” said Jennifer Fritzsche, an analyst at Wells Fargo & Co., referring to Windstream by its ticker symbol. She has the equivalent of a hold rating on Windstream stock. “It simplifies WIN’s core business focus and capital structure.”

Windstream got a favorable private letter ruling from the Internal Revenue Service for the transaction, it said today. The company is confident regulators will approve the deal because it will help increase broadband speeds for consumers, Chief Executive Officer Jeff Gardner said.

“If successful with this restructuring, and there are obviously high regulatory barriers, this will be a game changer for the valuation of non-REIT infrastructure stocks in our industry,” Tim Horan, an analyst at Oppenheimer & Co., said today in a note.

AT&T Inc., the biggest U.S. phone company, jumped 4.5 percent to $37.25. Verizon climbed 2.9 percent to $53.08. CenturyLink Inc., which like Windstream has phone lines in rural and suburban parts of the U.S., leapt 17 percent to $44.24. Another rural carrier, Frontier Communications Corp., surged 16 percent to $6.90.

“It is very unclear at this point if other larger telecom and cable companies will be able to replicate this structure,” said Stephen Sweeney, an analyst at Elevation LLC, in a note. “There are many IRS and FCC issues that will need to be clarified before we can reach a conclusion on that.”

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