Windstream Soars on REIT Plans

News Lifts Telecom Stocks Across Board
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Stock in Windstream Communications, the Little Rock, Ark.-based competitive local exchange carrier soared more than 20% on Tuesday on news the company plans to spin off its network assets as a real estate investment trust (REIT), which could give the company significant tax breaks and have sweeping implications across the broadband market.

Windstream stock was trading as high as $13.30 per share (up $2.77 each or 26.3%) in early trading Tuesday after it said it had received approval from the U.S. Internal Revenue Service to spin off its network assets – copper and fiber plant – into a separately publicly traded REIT, which would then lease back those assets to Windstream for $650 million per year. The move, Windstream said in a statement, would allow the company to reduce debt by about $3.2 billion and would significantly reduce its tax burden, freeing up more cash for upgrades and infrastructure improvements. The stock settled down in subsequent trading, closing at $11.83 per share on July 29, up 12.4% ($1.30) each.

“As a result of the transaction, Windstream will offer faster broadband speeds and more robust performance to consumers,” Windstream said in a statement. The company said it would expand availability of 10 Mbps Internet service to more than 80% of its customers by 2018 and make 24 Mbps service available to 30% of customers by that same year, aboiut twice its current availability.

The transaction could have implications for other broadband service providers as well. Stocks in several CLECS and broadband providers were up significantly in early trading as well.

AT&T shares rose 2.6% (94 cents) to $36.59 Tuesday, Verizon was up 1% to $51.97, and smaller CLECS saw even bigger gains – Frontier Communications stock rose 14.3% (85 cents) to $6.79 and CenturyLink increased 5.8% ($2.19 each) to $39.90 per share.

Some cable stocks also saw gains as a result of the Windstream announcement – Cablevision Systems was up 2.3% (44 cents) to $19.54 each.

In a note to clients, Elevation LLC analyst Stephen Sweeney said Windstream’s announcement could have sweeping implications across the telecom landscape, but added that it is still unclear on whether larger-cap companies will try to take advantage of the REIT structure or if the Federal Communications Commission would even allow it.

“We are frankly very surprised that [Windstream’s] network assets were deemed by the IRS to be true real estate assets,” Sweeney said in a research note. “We think it is far from clear if the FCC and other regulatory entities will ultimately approve this structure.”

Windstream said it hopes to close the spin by the first quarter of 2015. The transaction would still need approval from the FCC.

“We think one of the key questions on whether other telecom companies and cable can replicate this [Windstream]  REIT structure (fiber network, copper network, cable plant etc) really should be able to count as real estate assets,” Sweeney wrote. “Also, even if other telecom companies can theoretically pursue similar REIT structures, it is very unclear what the other ramifications are for telecom and cable companies’ ability to pursue future M&A and the tax treatment of deals.  …The FCC is still finalizing its net neutrality policy and we think today’s news on this deal structure could potentially affect the way the FCC approaches net neutrality.”

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