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(Telephony Via Thomson Dialog NewsEdge) As one of the industry's newest public companies, Windstream, the former landline business of Alltel which is now a wireless company is no small start-up. This company is big real big for an independent telephone company. The biggest, said CEO Jeff Gardner. It's 3.5 million customers across 16 states big. Three point four billion dollars in annual revenue big. Eight thousand employees big. But it's not big enough.
Like any healthy newborn, Windstream needs to grow. It's the main question about the business, said Mitch Mitchell, director of Mercer Management Consulting's communications, information and entertainment practice. It's not hard to guess one of the ways the company will achieve the necessary growth spurt. However, before we look at how Gardner and company plan to grow the company, let's look at their rationale for splitting the company in two and simultaneously merging the landline business with Valor Communications.
No need to go all the way back to the founding of Allied Telephone Co. in 1943, when it began servicing rural communities in Arkansas, Missouri and Oklahoma from its headquarters in Little Rock, Ark. Nor is it necessary to go back to 1983 when Allied merged with Mid-Continent Telephony Co. of Ohio to form Alltel the nation's fifth-largest local telephone company at the time.
But starting in 1993, the company began to do what Gardner said is so essential for successful companies to do: reinvent themselves every five years or so. In 1993, it acquired GTE in Georgia and its 320,000 access lines and directory publishing business. In 1996, it became a long-distance company as well. In 1999, Alltel merged with Standard Group in Cornelia, Ga., and Aliant Communications of Lincoln, Neb., adding another 71,000 and 293,000 access lines, respectively, as well as 70,000 long-distance customers from Aliant.
A year later, Valor Telecom was formed with assets from GTE Southwest. Two years after that, in 2002, Alltel purchased 600,000 lines from Verizon in Kentucky. Somewhere in the midst of all that, Alltel built a wireless business 11 million customers strong. And in 2005 it announced the separation of its wireless and wireline businesses and the creation of Windstream.
Why?
For years the wireline business had been one that we could apply a little strategic horsepower to, and it would move along just fine, Gardner said. But it became clear that to be successful in the long run, the wireline business which was really the engine that produced the cash flow that helped Alltel grow into one of the largest companies in the U.S. would need 100% strategic focus.
Gardner believed and still does that during the next 10 years, the company could create more value for shareholders by separating the wireline and wireless businesses. So far, investors must believe it, too.
If you look at how the stock has performed, the answer from the market is that we have unlocked some value here, he said. This is not going to be the highest-growth business in the world, but it is one I believe we can transform.
Gardner has been involved in several business transformations, but he said by far this was the most difficult. Obviously, rather than the merger process he had been through several times, this was a company split. It also was the creation of a new public company and the simultaneous merger with Valor. To make matters worse, prior to the split, Alltel had done a tremendous job integrating its businesses to drive low operational costs, which is great for a united company's bottom line, but can make it awfully tough to split it apart.
It meant Windstream would have to rebuild a customer service department as well as many of the internal business functions, such as human resources, and had to separate engineering and marketing teams. And it had to do it while incorporating or altering the same functions and processes from Valor.
Besides bulking Windstream's access line numbers, the Valor merger did something else: It paid for the cost of setting up the new public company with additional financial synergies left over.
Gardner said setting up a new public company would require another $12 million. That's a run rate of $12 million a year forever, he said.
So Gardner and his team looked for a deal that could offset some of that cost. With Valor, we could drive $52 million in synergies. So if you subtract the $12 million in start-up costs, shareholders were better off by almost $40 million. And we were a bigger entity as a result.
It's difficult not to make comparisons to another big and newly created independent telco: Embarq, the landline spinoff from Sprint, which also claims to be the largest provider of services to rural America. Here's how Gardner sets the record straight:
They are a large company with a similar market cap. We are much more rural than Embarq. When you look at access lines per square mile, we are in much less dense markets, Gardner said. But we have higher margins, higher broadband penetration and we pay much bigger dividends.
Keith Paglusch, chief operating officer of Windstream, said there is a big difference in the average density of their respective markets. Windstream currently has about 25 access lines per square mile, whereas Embarq has 105. The average for rural providers is around 130 access lines per square mile. The largest metropolitan areas that Windstream serves are in Lexington, Ky., and Lincoln, Neb. Embarq has Las Vegas and Orlando, Fla.
The challenge going forward as stated above is for Windstream to grow and not for that average number of access lines per square mile to shrink further because of the industry pandemic known as access-line loss. Gardner said that the company has faired better than some in this area. In the second quarter of this year, Alltel reported access line loss of 4.1% compared with 4.5% for CenturyTel and 4.6% or more for Citizens.
So even before we started our new marketing campaign, we had some of the best access-line loss numbers in the business. And we can build on that, Gardner said. I believe that if we can get broadband and digital television customers signed up, we will have an impact on customer losses.
To date, penetration rates in television services are not enough to offset that loss. It is less than 2%. However, Windstream has invested heavily in its ability to deliver entertainment services with its partner EchoStar. And its broadband penetration is in the high teens, Gardner said, and moving toward a record year. The company has offered what Gardner called meaningful bonuses to all employees if they reach their goals.
It is this type of investment and focus the landline business was not able to apply as part of Alltel.
Our folks have been a non-strategic part of a large wireless company for a long time. Gardner said. Now Scott Ford and his team are free to pursue their path to maximize returns without worrying about the wireline business, and we are free to do the same, to apply a much different approach, get more aggressive and grow this business through acquisition.
There. He said it. Now that the ice has been broken, and the a word uttered, let's get into the subject everybody wants to hear about.
Mercer's Mitchell said the industry is really poised for another round of pretty substantial consolidation. But the big question is: Who is going to be the real catalyst for the next big roll-up in the independent space? he said.
Gardner would not get specific about certain opportunities for acquisition that may have passed by when Windstream was part of Alltel, but he did say: From 2002 through 2005, Alltel's strategic focus was 100% on wireless, so we missed out on opportunities where we could have been a disciplined acquirer of access lines that we believe could have added great value for shareholders and driven a lot of synergies, he said.
Gardner believes there will be an opportunity for some company to become the leader in the rural space and that Windstream can be that company. We have the expertise from an M&A perspective. We have the lowest costs in the business, and we are already in 16 states with 3.4 million customers, he said. Over time, Verizon and/or AT&T will decide to exit some rural markets where their fiber strategies don't make sense because of these density issues. A company like Windstream could operate those markets in a more efficient way.
Gardner said his company can run rural markets better than anyone and that, We like markets with no Starbucks on the corner. We know how to operate there.
That doesn't mean Windstream will run out and buy every available rural access line. We will grow this business over time, but we will do it in a very disciplined way. In these cash-flow businesses, you have to be very cautious not to overpay, Gardner said. I am a former CFO and have a lot of financial expertise on my team, which is perfect for the capital structure and M&A environment we will be operating in.
Windstream also will look at acquiring other rural telcos, not just cast-off lines from AT&T, Qwest or Verizon. Although, as Mercer's Mitchell said, It's certainly a lot easier to acquire six millions lines from one company than through several small phone company roll-ups.
Gardner said that while M&A activity is a big part of Windstream's story, he didn't want to overstate it because the company also has to grow internally and develop its own culture.
The company's internal growth plans include a focus on broadband and entertainment but also address another big question for watchers of Windstream: What about wireless?
Paglusch said Windstream will make the go/no-go decision about a future wireless offering in the next few months. We will not build our own wireless network, he said. If we do anything at all, we would be a [mobile virtual network operator].
That if doesn't sound like a very big one because Gardner said the decision is very close and that the company would be a reseller of services from multiple wireless operators. And Paglusch said, I am straight up when I say that the future of communications is about both wireline and wireless services.
On whether or not Alltel would be one of those operators whose service Windstream resells, Paglusch said, At this point, anything is fair game. We have great respect for Alltel. They have fantastic service in our rural communities. But we will also look at Verizon, Sprint and Cingular.
Asked about the struggles other MVNO's such as Disney and ESPN are having, Paglusch dismissed it by saying those companies' propositions are different.
They have very specific applications and are banking on their brand names, he said. In our case, our brand equity is with the people who have worked in our communities for years. We would be packaging communication and entertainment products, whereas they package their brand and specific apps.
Even with a wireless offering, Windstream will be a rural communications company with wireless playing a complementary role; it will not necessarily become a provider of fixed/mobile converged services.
We would package wireless as something to use when you're not near your landline phone, Paglusch said. He had spent 18 years at Sprint so he knew converged services are not always the best option. This is another way the company is different from Embarq, whose strategy is all about the convergence of wireline and wireless.
Converged services are good when they benefit the customer and the customer says, My life is easier because of those services. Paglusch said. But for the technology to enable converged services even if the customer doesn't understand it or use it in a converged way doesn't make sense.
Another service that doesn't make sense to Paglusch and Windstream in general is fiber-based IPTV. We have looked at it and will continue to look to see if there is any benefit there. But at the moment, we don't see a compelling reason to offer IPTV services, he said. I understand the view that says he who wins the TV race could win the bundle, but right now, our anchor is clearly our telephone service and quickly growing broadband service.
Gardner said it is very unlikely that a fiber-to-the-home strategy would work in most rural markets because it is tremendously cost prohibitive. Instead, Windstream is putting its resources post-surgery into building its brand and tweaking its operations.
Paglusch has been touring the company soliciting input from employees, whose ideas the company has taken to heart and actually implemented.
Our employees are now saying, Wow, they're really listening to us, he said. The stick to that carrot is that the employees are also being held more accountable for specific results.
Employee-inspired changes at Windstream include the way the company manages customer credit and the way it bundles services. For the first time, the company is offering broadband service independent from voice service and is test marketing Simplified Broadband in four markets, including Harrison, Ark., and Jasper, Ga.
Through skip level meetings with employees, Windstream discovered something else. I didn't hear our pricing was an issue. I didn't hear our products were an issue. I heard visibility was an issue, Paglusch said.
Visibility shouldn't be an issue for long with the company's new mascots a pair of vintage apple-green pickup trucks completing their 33-market promotional tour. They're hard to miss and probably one of the better marketing tools of the modern, high-tech communications age.
It was important to have something iconic in our ads, Gardner said. So much of what you see today, you forget about yesterday. It's a great symbol for the transformation we're trying to create and for bringing the old and new together.
Part of that transformation includes adopting some of the database technologies and processes from Valor that enable features like Caller Name ID that require dips into third-party databases. It also includes the aforementioned employee-inspired changes and building its own human resources department and customer service operations, including call centers, the continued buildout of its broadband infrastructure, the integration of the Valor properties, building brand loyalty, growing its CLEC's enterprise business, and making that wireless decision, then implementing it.
The management team is trying to create a new culture, but not one vastly different from the one at Alltel. Gardner said Alltel has a great culture. However, they are trying to change the mindset somewhat. We want a team with a different view in terms of how to market this business instead of thinking of it as a detriment to the wireless business. The world is changing, and we have to take advantage of having 3.4 million customers and this cash flow to change with it, Gardner said.
He knows the aura of being a new company won't last forever and that Windstream must produce. So as part of its new culture, management is simply making Windstream a great place to work for people who want to work.
I am not a big believer in being able to motivate people. I can't force someone to get out of bed in the morning, but I can create an environment for people to motivate themselves, Paglusch said.
As a new company, Windstream had to define a new mission statement and a set of core values. It did so with a 25-member cross-functional team from throughout the company. We didn't do it top down with executives, Paglusch said.
And so they have a virtue for each letter of the Windstream name, which is not, by the way, where the name came from. The name is meant to convey a new, fresh way of doing things. Wind and streams are part of the Arkansas heritage. Its origins are not, as Paglusch said, like anyone's dead grandfather was called Windstream.
With its first full quarterly earnings call right around the corner, Windstream will either get an extension of its honeymoon with investors or that honeymoon will come to a quick end. At Alltel, they had what Mitchell called a magic potion that helped them run their business with one of the industry's leanest operations models.
Windstream may or may not be able to duplicate that magic, but with all the good will emanating through the walls of the nearby Christ the King Catholic Church or the Temple B'nai Israel or the First Baptists Church of Little Rock or the Trinity Assembly of God, or all of them combined, perhaps Windstream stands a chance.
Copyright 2006 by Prism Business Information. All rights reserved.www.prismb2b.com
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