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Uniti taking fiber-market center stage

CEO touts ‘best companiesin the world’ as customers by Andrew Moreau | August 30, 2020 at 2:07 a.m.

It's been difficult for Uniti Group Inc. to forge a public identity apart from the company that created it -- Windstream Holdings Inc.

Uniti President and Chief Executive Officer Kenny Gunderman acknowledges the challenge and recognizes the company has been toiling in the shadow of Windstream.

"Much of Uniti's story gets way overshadowed by Windstream," Gunderman said. "We have a great business, with great customers and we own a tremendous amount of valuable real estate."

Now, the Little Rock company is primed to take advantage of that real estate -- a robust fiber infrastructure that stretches across the United States and connects some of the nation's largest communications and technology companies with their customers and with data centers that are the hub of the e-commerce explosion.

Uniti owns 118,000 route miles of fiber conduit and about 6.5 million strand miles (route miles multiplied by the number of fiber strands), and the company continues to add more every day. Its customer roster includes prized brands: AT&T, Amazon, Facebook, Google and Verizon all rely on Uniti to connect with their consumer and business customers.

Uniti is one of the top 10 owners of fiber in the country and provides fiber and wireless tower connections for more than 25,000 customers, Gunderman said.

"We've got substantial customer diversification," Gunderman said, "and these customers are the best companies in the world."

That wasn't always the case, however.

When it was created in April 2015 as a spinoff from Windstream, Uniti had a single customer -- Windstream -- that provided 98% of its $700 million in revenue. Today, Uniti is a $1.1 billion company and its reliance on Windstream has been reduced to 65% of the revenue mix.

In March, Uniti and Windstream settled a leasing dispute after slogging through seven months of litigation. The fight centered on a $650 million annual rent agreement that Windstream pays to use Uniti's fiber-optic network in 13 states.

Under the settlement, Windstream will continue the long-term lease while gaining an investment of up to $1.75 billion over 10 years from Uniti. The agreement also says Uniti will pay Windstream about $490 million in cash and purchase fiber assets from Windstream for another $285 million.

Gunderman and Windstream President and CEO Tony Thomas both note the settlement agreement is mutually beneficial.

"The Uniti settlement enables Windstream to expand fiber to the home to millions of locations over the next few years," Thomas said in an interview. "For Uniti, that's an investment in their own asset. And for Windstream, we get to use that fiber exclusively for our own customers."

Uniti, Gunderman said, is investing in its strongest asset -- its fiber network-- and securing a long-term leasing arrangement with its largest customer.

"We're investing to help Windstream, but it's ultimately our asset that is being built," Gunderman added. "For us, this helps put the cloud that's been hanging over us behind and focus on our business and our customers and stakeholders."

Outside observers agree that Uniti benefits from a stronger Windstream, which will emerge from bankruptcy soon.

"Once Windstream emerges, it should benefit Uniti as its largest tenant will be a healthier company in terms of (debt)," Bank of America analyst David Barden wrote in an Aug. 11 update on Uniti.

With the Windstream issue largely behind it, Uniti has a renewed commitment to focus on the fundamentals of its business -- expanding and leasing its extensive fiber network.

Providing that key infrastructure positions Uniti to play a leading role in the ongoing broadband and technology evolution that demands fiber connections to deliver faster and more robust services to customers.

"All of those things make our infrastructure even more valuable and those trends are going to continue going forward," Gunderman said.

INTEREST IN 5G

Even more, the commitment wireless providers are making to deploy 5G technology also bodes well for Uniti.

"That's a huge tail wind that is driving demand from our customers," Gunderman said. "The requests that we're getting today to add fiber from customers like AT&T, Verizon and T-Mobile will enable them to add denser coverage and faster service in 5G deployment."

The continuing expansion of e-commerce and the transition to more employees working from home heightens the demand for Uniti's infrastructure.

To meet the increased demand, Uniti is expanding its core fiber network through build-outs and is on the hunt for mergers-and-acquisitions opportunities.

"Our customers are growing and the services they provide are in high demand," Gunderman said.

Uniti takes a conservative approach to fiber build-outs. There is no effort to add capacity until a customer requests it.

"We never build fiber until a customer tells us they want it," Gunderman said. "We build fiber for an anchor customer that needs more fiber to expand their services."

And customers agree to long-term leases, providing Uniti with a reliable revenue stream.

Earlier this month, Uniti's chief financial officer, Mark Wallace, told analysts that 97% of the company's revenue is recurring, with an average term of about nine years.

While increasing focus on its fiber operations, Uniti has sold off much of its wireless tower business.

In June, for example, Uniti closed on the sale of about 500 towers -- 90% of the total owned -- to Melody Investment Advisors of New York.

The sale delivered $220 million in cash to Uniti, which retained 10% ownership of the towers and will earn additional dollars for towers completed this year. The sale was for 35 times cash flow of the towers, Gunderman said.

"We were paid a very attractive valuation and price for that business," he added. "That allowed us to stay in the tower business but prioritize our capital to building fiber."

After the Melody agreement, Uniti now has sole ownership of about 200 wireless towers.

Uniti will take an active approach in seeking potential mergers or acquisitions, Gunderman said. "That's been a big part of our business in the past and will continue to be," he added.

Barden, the Bank of America analyst who covers Uniti, also noted that mergers-and-acquisitions activity could gain momentum. "Once the Windstream situation is put to rest, Uniti's cost of capital should improve allowing it to execute more aggressively on its M&A strategy," Barden wrote.

Development and deployment of 5G wireless technology also should help drive the company's mergers-and-acquisitions strategy, Gunderman said.

"There's a tremendous amount of interest from investment funds in buying 5G infrastructure or investing in companies like Uniti that provide 5G infrastructure," he said. "We're one of the few public companies that do that, and we're also one of the largest owners of that infrastructure in the country."

In addition, Uniti will pursue opportunities to acquire other fiber providers, according to Gunderman.

"We believe there's a tremendous amount of fiber for us to acquire around the country, and that includes acquiring other fiber companies or portfolios of fiber," he added. "That will be a big part of our business going forward."

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