Windstream Grabs Another

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Windstream Grabs Another

Windstream follows up its acquisition of CLEC NUVOX with the purchase of an ILEC. Windstream Announces Acquisition of Iowa Telecommunications Services for $261M in cash, $269M in shares and $598M in debt (see Reuters).

In its latest SEC 10Q filing, it states:

"On November 2, 2009, Windstream entered into a definitive agreement to acquire all of the issued and outstanding shares of common stock of NuVox. As discussed under "Pending Transactions" above, Windstream expects to pay approximately $280.0 million in cash and assume $180.0 million in net debt in the first half of 2010 as part of the transaction, which will be financed with existing cash on hand and borrowings available under the Company's revolving line of credit. ... As discussed above under "Liquidity and Capital Resources", on October 8, 2009, Windstream completed the private placement of approximately $400.0 million aggregate principal amount of senior unsecured notes due 2017. The net proceeds will be used to finance the cash portion of the purchase price of the D&E and Lexcom acquisitions, estimated to be approximately $75.0 million and approximately $141.0 million, respectively, to refinance certain indebtedness of D&E, approximating $180.8 million, in connection with the merger, to pay related transaction fees and expenses and for general corporate purposes."

"Additionally, during October, Windstream received consent from its lenders to an amendment and restatement of its $2.2 billion senior secured credit facility. Windstream amended and restated its senior secured credit facility to, among other things, extend the maturities of the facility and amend certain covenants, resulting in increased interest rates on the extended maturities. See "Liquidity and Capital Resources" above for the extended maturities and related interest rate increases. Scheduled principal payments under the amended debt structure will approximate $23.8 million, $142.8 million, $42.3 million, $1,248.0 million and $20.8 million for each of the twelve month periods ended September 30, 2010, 2011, 2012, 2013 and 2014, respectively. The scheduled principal payments remaining after 2014 approximate $4,170.1 million." That's 4.2B! It's long term debt as of 9/30/09 was $5.2B.

Revenue is $735M per quarter or $2.9B per year. And they picked up $600M more in debt today - to reach $5.8B. Will it have enough free cash to pay that back? Revenue for ILECs is dropping as the landline business gets competitive - people leave for cellular or cable or VoIP. These rural ILEC's can't afford to provide fiber-to-the-Hood (FTTH)because it's too rural. (That's one reason that VZT has been selling off its rural assets. The other reason I think is to enhance its balance sheet before Wall Street figures out that VZ's balance sheet is as pretty as BoA.) Still the triple-play offering requires DirecTV or DISH. No cellular property. (Windstream is th eresult of a spin-off; Alltel merged its landline biz with Valor in 2005 to create Windstream. It was similar to Sprint spinning out Embarq.) It's time to get creative because massive long term debt is not your friend.

I was talking with Geoff Shepstone of TBI yesterday about the 2013-2015 time frame for telcos as much debt comes due at that time. Between now and then, there will likely be much consolidation, because there's too many players pushing the revenues down as they compete on price. 

What do you do when you used to be a monopoly with no competition and a fixed rate of return of high margin? Now you are one-half of a duopoly fighting for half the pie and half the margin? Scramble. Merge. Acquire. 

How about Innovate? No true innovation or differentiation has happened in telecom in a while. (Hosted PBX, SIP Trunking, G.SHDSL, EoC, FTTH, GPNO and Metro Ethernet not withstanding).

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