Windstream's REIT Gambit: A Heavy Reading Reality Check
|出版日||ページ情報||英文 20 Pages
|WindstreamのREIT戦略：Heavy Readingによる実態把握 Windstream's REIT Gambit: A Heavy Reading Reality Check|
|出版日: 2014年09月30日||ページ情報: 英文 20 Pages||
The IRS provided new guidance in May regarding what assets could be put into a tax-free real estate investment trust (REIT) vehicle. Windstream has seen the opportunity to put its passive access network (copper and fiber lines) into a REIT, which it will spin off tax free to existing investors. The alternative of simply selling the assets to a third party would incur capital gains tax.
The Windstream REIT decision generated a burst of excitement from financial and industry analysts who initially saw something visionary and ground breaking in the strategy. Almost as quickly, however, that enthusiasm gave way to skepticism over whether other telecom operators would have anything to gain from following a similar strategic course. Even in the telecom industry's accelerated hype-to-deflation cycle, the REIT strategy soared and fell in nanoseconds.
But dismissing the Windstream REIT strategy without fully understanding it is just as impulsive as labeling it as revolutionary before the planet actually completed one full revolution. A deeper look at Windstream's strategy and the factors that influenced it shows that, while most telecom operators aren't likely candidates to follow Windstream's path, there may be some promise in the REIT gambit for some, either now or at some future point.
The spinoff does create some shareholder value. Windstream estimates the REIT spinoff will boost free cash flow to shareholders by $115 million. However, this is before taking into account an approximate $118 million increase in annual capex to garner political support for the spinoff and compete more effectively with cable companies. Heavy Reading estimates suggest the boost to free cash flow is worth around $1 per share - slightly less than the positive share price reaction on the day Windstream announced the spinoff.
Other telcos are likely to try REIT spinoffs. Windstream has set a precedent with its copper/fiber-line REIT, which we believe other operators may try to follow. However, tax avoidance vehicles such as REITs are unnecessary if a company is sitting on large tax loss carry-forwards, which it can use to offset against current pre-tax profits. The only U.S. wireline operators that appear to pay any material corporation tax are AT&T, CenturyLink, Frontier Communications and Verizon.
The strategic rationale for the spinoff is unclear. Some cynics have suggested that Windstream's REIT spinoff plan is just an elaborate distraction from the fact that the company has had to cut its dividend by 30 percent in order to fund capex that is needed to compete more effectively with cable competitors. Given the rally in the share price on the day that the dividend cut and REIT spinoff was announced the "distraction" seems to have worked.
Windstream's REIT Gambit: A Heavy Reading Reality Check analyzes Windstream's decision to spin off its legacy network assets, focusing on the factors that influenced the decision and the applicability of those factors to other network operators. It explores and answers two key questions about the Windstream move: Does it create value for the company's shareholders, and does it reduce the company's debt leverage The report analyzes the relative financial and ownership positions of other network operators to determine which ones may potentially benefit from spinning off their legacy assets in a REIT.
Windstream will lower its net debt position by transferring $2.2 billion of its debts to the REIT and also by receiving a $1.2 billion cash injection from the REIT. After advisor fees (bankers, lawyers, accountants) of $150 million, the company's net financial debt should reduce by $3.2 billion from $8.5 billion to $5.3 billion. However, Windstream will transfer its fiber and copper plant to the REIT and must pay $650 million per year in rent to use those assets.
Companies covered in this report include: Alaska Communications Inc. (Nasdaq: ALSK); AT&T Inc. (NYSE: T); CenturyLink Inc. (NYSE: CTL); Cincinnati Bell Inc. (NYSE: CBB); Cogent Communications Inc. (Nasdaq: CCOI); Consolidated Communications Inc. (Nasdaq: CNSL); EarthLink Inc. (Nasdaq: ELNK); Fairpoint Communications Inc. (Nasdaq: FRP); Frontier Communications Corp. (Nasdaq: FTR); Hawaiian Telcom Inc. (Nasdaq: HCOM); Level 3 Communications Inc. (NYSE: LVLT); Lumos Networks Corp. (Nasdaq: LMOS); Verizon Communications Inc. (NYSE: VZ); and Windstream Holdings Inc. (Nasdaq: WIN).