Windstream seeks fixed-asset trust

Move, if OK’d, will spin off real estate, some copper and fiber networks

Windstream Holdings Inc. shares surged 12 percent Tuesday after the company said it would spin off some of its assets into a publicly traded real estate investment trust.

If approved, the move by Windstream to fold its copper and fiber networks, along with other fixed assets, into an investment trust would be a new way for telecommunications companies to generate value from their networks, analysts said.

Windstream shares rose $1.30 to close Tuesday at $11.83 in heavy volume on the Nasdaq stock exchange. The shares reached an intraday high of $13.30.

"If successful with this restructuring, and there are obviously high regulatory barriers, this will be a game changer," Timothy Horan, an analyst for Oppenheimer & Co. said in a research note. Considering the infrastructure they own, other telecommunications companies are "20 percent or so undervalued across the board," Horan said.

Other similar communications companies saw stock gains Tuesday. Shares of Verizon Communications Inc. rose 39 cents to close at $51.97, AT&T Inc., saw a 2.6 percent increase to $36.59 and CenturyLink, Inc. shares jumped 5.8 percent to $39.90.

The transaction, which received an approval letter from the Internal Revenue Service, remains subject to regulatory approval.

Windstream said the tax-free spinoff will allow the Little Rock company to lower debt by about $3.2 billion and free up cash, which would allow it to accelerate broadband investments.

"The spinoff of these [telecommunication] assets into a REIT will make Windstream a more nimble competitor," Windstream Chief Executive Officer and President Jeff Gardner said in an interview.

The conversion of Windstream's assets into an investment trust is expected to occur in the first quarter of 2015. The trust will lease the property to Windstream through a long-term contract with an initial rent of about $650 million per year.

Real estate investment trusts typically are companies that own income-producing real estate ranging from apartment and office buildings to hospitals, shopping centers, hotels and warehouses.

The investment trust, which will employ about 25 people, will focus on expanding and diversifying its assets and tenants through future acquisitions, the news release said.

Tony Thomas, Windstream's chief financial officer, will become chief executive officer of the trust if the plan is approved. Francis X. Frantz, a director at Windstream, will become chairman of the trust's board of directors.

While cellphone tower and data center companies have moved assets into real estate investment trusts before, Windstream would be the first telephone and Internet services company to do so, said Stephen Sweeney, an analyst with Elevation LLC.

"I think other telecom and cable companies will evaluate whether they can replicate a similar structure, but it's unclear right now if the larger companies will try and go that route," he said.

By creating a real estate investment trust, Windstream was able to show there was a way to enhance the value of the company's shares, said Bob Williams, senior vice president and managing director of Delta Trust Investments Inc.

As a result of the spinoff, Windstream's annual dividend will drop to 70 cents from $1. Windstream will pay 10 cents per share on the dividend and the trust will pay 60 cents, Gardner said.

In recent years, investors have questioned Windstream's ability to pay a $1 dividend as its profit margins dropped as a result of several acquisitions.

Several of Windstream's competitors have also lowered their dividends in recent years.

Gardner said the investment trust will create a steady cash flow for Windstream.

"We think the overall dividend is much safer now," Horan said in his note.

Business on 07/30/2014

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