Windstream came up with the novel approach of designating its network circuits (fiber or copper) as real estate, and recently received approval from the Internal Revenue Service. The new designation was allowed using the legal definition of “real estate,” or income earning assets that cannot be moved. Certainly, a copper or fiber circuit falls into that category. Windstream will use the approval by the IRS to create a Real Estate Investment Trust (REIT), which will be spun off into another investment opportunity for interested parties. Windstream also intends for the new REIT to pay its shareholders a dividend. The REIT won't owe any corporate tax, as long as it pays out 90% or more of its taxable income.
At first glance, this looks like an opportunity for other carriers to spin off their network circuits into a REIT, as the IRS has set the precedent with its endorsement of Windstream’s actions. However, early consensus is that while a few facilities-based IXCs and CLECs may decide to take advantage of this form of tax shelter, the larger ILECs, such as AT&T and Verizon, may choose to avoid exposing their networks to competitors at regulated rates. Time will tell if that interpretation holds, since the tax savings to Windstream is estimated to be between $100 million and $200 million. Windstream intends to use this freed up cash to accelerate its implementation of an IP network, as well as pursue other investment opportunities.
With $6 billion in revenues, Windstream is the fourth largest ILEC in the country. If this tax-free spinoff will enable them to reduce their debt by $3.2 billion, and save hundreds of millions in taxes, rest assured AT&T, Verizon and CenturyLink will be investigating whether they can benefit by taking a similar path.
Windstream plans to transfer certain telecom assets to the REIT, then rent those assets back. All fiber and copper circuits, as well as buildings and poles, will be transferred as assets into the REIT, but equipment will remain as assets of Windstream. The REIT will pay out most of its income as a dividend to its shareholders.
While most analysts view the potential creation of the REIT as a smart move, there are a few naysayers. I’ll monitor this story for a while and let you know how it plays out.