WIN - Windstream

[cameronfen]

Windstream is an RLEC (rural local exchange carrier).  The company came on my radar because they are spinning off their telecom assets into a REIT called Communication Sales and Leasing (CSAL) like an AMT or Crown Castle International, but smaller.  The REIT should generate about 450 million dollars in FFO.  At a 15 multiple (which is way lower than AMT or CCI albeit both of them are bigger than CSAL), CSAL is valued at 6.7 billion dollars which is 45% upside from the current market cap of WIN.  WIN will not be profitable from a NI standpoint after the spinoff but should still generate FCF (and will continue to pay a dividend).  There are some complications with the spinoff.  WIN will retain about 20% of CSAL which means shareholders are only getting about 5.4 billion value. 

 

Here is a write up on VIC from a couple of years ago: http://www.valueinvestorsclub.com/idea/WINDSTREAM_CORP/84875#description

 

Someone else on this forum also had a write up linked to on their signature, but I was forgot who it was. 

[gfp]

Someone else on this forum also had a write up linked to on their signature, but I was forgot who it was.

 

J. Allen had this post -

 

http://jallencapitalmanagement.com/posts/windstream-spinoff-win.html

[cameronfen]

Someone else on this forum also had a write up linked to on their signature, but I was forgot who it was.

 

J. Allen had this post -

 

http://jallencapitalmanagement.com/posts/windstream-spinoff-win.html

 

Yep that was it. 

[krazeenyc]

I'm not interested in the REIT for various reasons, but I bought shares of WINVV (Windstream Stub) late this afternoon (my cost is the same as the closing price). I believe they are trading at a huge discount to their peers now -- I think there is 200%+ upside.  It is currently trading at ~4x OIBDA and less than 5x FCF. They will also be paying a 4.9& yield based on today's closing price.

 

[Packer16]

How do you get comfortable that the underlying business is returning to growth?  This transaction has made the stub a levered play on Windstream returning to growth.  If revenues continue the historical decline they will most likely end up in distress due to the negative operating leverage working against them as revenues decline.  At some point the coverage ratios will decline and there may be stress on the payment to the REIT.  I am just having a hard time understanding how adding more leverage via the REIT payments makes sense for declining revenue business.  I have also told myself to stay away from leveraged businesses that have declining revenues/cash flows as I have rode a few of these to 0 on the way to BK.

 

This is a nice leveraged play if Windstream and other LECs return to revenue and cash flow.  I am just having a hard time seeing it with Windstream.

 

Packer

[krazeenyc]

How do you get comfortable that the underlying business is returning to growth?  This transaction has made the stub a levered play on Windstream returning to growth.  If revenues continue the historical decline they will most likely end up in distress due to the negative operating leverage working against them as revenues decline.  At some point the coverage ratios will decline and there may be stress on the payment to the REIT.  I am just having a hard time understanding how adding more leverage via the REIT payments makes sense for declining revenue business.  I have also told myself to stay away from leveraged businesses that have declining revenues/cash flows as I have rode a few of these to 0 on the way to BK.

 

This is a nice leveraged play if Windstream and other LECs return to revenue and cash flow.  I am just having a hard time seeing it with Windstream.

 

Packer

 

I definitely agree that it is dangerous to get involved in a leveraged businesses with declining revenues/cash flows (see WTW for example!). Windstream has struggled due to losing a lot of high margin legacy business and not growing other businesses quickly enough to offset those revenues -- and suffering the double whammy of declining revenues and declining ebitda margins due to business mix. I don't have faith in Windstream returning to growth, but I think that as the declining legacy businesses become a smaller and smaller part of the pie the revenue decline will slow down (2% or less) while maintaining ~34% ebitda margins or in a bullish case hold both revenue and ebitda margins steady. I think in both cases you do pretty well, and in the bullish case you will do extremely well. 

 

There are 2 pieces of the puzzle that are crucial to my thesis. 1) Windstream is able to maintain ~34% ebitda margins over time even with slowly declining revenue and 2) Current Capex is elevated due to certain program capex projects -- such as the long haul express network.  I expect that if their growth efforts aren't working they can bring capex down to as low as $650-$700MM annually.

 

I think the market is not appreciating the fact that Windstream is holding on to 20% of the REIT -- until they liquidate to further reduce debt.

 

I also suspect that during the last conference call, given the new CEO, they may have been extra conservative with guidance. 

[Guest Schwab711]

How do you get comfortable that the underlying business is returning to growth?  This transaction has made the stub a levered play on Windstream returning to growth.  If revenues continue the historical decline they will most likely end up in distress due to the negative operating leverage working against them as revenues decline.  At some point the coverage ratios will decline and there may be stress on the payment to the REIT.  I am just having a hard time understanding how adding more leverage via the REIT payments makes sense for declining revenue business.  I have also told myself to stay away from leveraged businesses that have declining revenues/cash flows as I have rode a few of these to 0 on the way to BK.

 

This is a nice leveraged play if Windstream and other LECs return to revenue and cash flow.  I am just having a hard time seeing it with Windstream.

 

Packer

 

Agree with Packer on the business, especially considering a lot of the Paetec lines are in areas being funded/developed by numerous projects that represent competition forming faster than ever projected. A large portion of Windstream's business is legacy Paetec and it was extremely surprising to see the CEO (arunas chesonis) sell Paetec at the time of transaction (2-3 years ago?). Windstream's revenue (and what looks like legacy Paetec as well) has been declining as mentioned so I would be skeptical of the future prospects. Arunas was a pretty impressive CEO and has already built a huge company in just these few years. I would at least consider why since he is a very knowledgeable market participant.

[krazeenyc]

How do you get comfortable that the underlying business is returning to growth?  This transaction has made the stub a levered play on Windstream returning to growth.  If revenues continue the historical decline they will most likely end up in distress due to the negative operating leverage working against them as revenues decline.  At some point the coverage ratios will decline and there may be stress on the payment to the REIT.  I am just having a hard time understanding how adding more leverage via the REIT payments makes sense for declining revenue business.  I have also told myself to stay away from leveraged businesses that have declining revenues/cash flows as I have rode a few of these to 0 on the way to BK.

 

This is a nice leveraged play if Windstream and other LECs return to revenue and cash flow.  I am just having a hard time seeing it with Windstream.

 

Packer

 

Agree with Packer on the business, especially considering a lot of the Paetec lines are in areas being funded/developed by numerous projects that represent competition forming faster than ever projected. A large portion of Windstream's business is legacy Paetec and it was extremely surprising to see the CEO (arunas chesonis) sell Paetec at the time of transaction (2-3 years ago?). Windstream's revenue (and what looks like legacy Paetec as well) has been declining as mentioned so I would be skeptical of the future prospects. Arunas was a pretty impressive CEO and has already built a huge company in just these few years. I would at least consider why since he is a very knowledgeable market participant.

 

The legacy PAETEC business is definitely struggling. 

[cameronfen]

How do you get comfortable that the underlying business is returning to growth?  This transaction has made the stub a levered play on Windstream returning to growth.  If revenues continue the historical decline they will most likely end up in distress due to the negative operating leverage working against them as revenues decline.  At some point the coverage ratios will decline and there may be stress on the payment to the REIT.  I am just having a hard time understanding how adding more leverage via the REIT payments makes sense for declining revenue business.  I have also told myself to stay away from leveraged businesses that have declining revenues/cash flows as I have rode a few of these to 0 on the way to BK.

 

This is a nice leveraged play if Windstream and other LECs return to revenue and cash flow.  I am just having a hard time seeing it with Windstream.

 

Packer

 

I definitely agree that it is dangerous to get involved in a leveraged businesses with declining revenues/cash flows (see WTW for example!). Windstream has struggled due to losing a lot of high margin legacy business and not growing other businesses quickly enough to offset those revenues -- and suffering the double whammy of declining revenues and declining ebitda margins due to business mix. I don't have faith in Windstream returning to growth, but I think that as the declining legacy businesses become a smaller and smaller part of the pie the revenue decline will slow down (2% or less) while maintaining ~34% ebitda margins or in a bullish case hold both revenue and ebitda margins steady. I think in both cases you do pretty well, and in the bullish case you will do extremely well. 

 

There are 2 pieces of the puzzle that are crucial to my thesis. 1) Windstream is able to maintain ~34% ebitda margins over time even with slowly declining revenue and 2) Current Capex is elevated due to certain program capex projects -- such as the long haul express network.  I expect that if their growth efforts aren't working they can bring capex down to as low as $650-$700MM annually.

 

I think the market is not appreciating the fact that Windstream is holding on to 20% of the REIT -- until they liquidate to further reduce debt.

 

I also suspect that during the last conference call, given the new CEO, they may have been extra conservative with guidance. 

 

 

The problem with the parent is the declining cash flows and revenues.  Additionally the company will have to pay capex expenses for CSALs assets (which is a problem from both CSAL and WIN for different reasons).  This means less EBITDA is converted to FCF than a typical RLEC.  The second problem is this year CSAL is paying 50 million in CAPEX for WIN.  That won't continue, although the interest savings from selling its 20% of the REIT will make up for that.  But it's important that that is not double counted.  Debt to Unlevered FCF is something like 12x and 10x after the sale of CSAL stock.  Capex is roughly 10-20% lower than D&A for WIN historically (if you include CSAL D&A which WIN has to pay capex for) that gets to around 850-900 million on the low end.  Hard to see how they can get down to 650-700 million in capex

 

 

[krazeenyc]

How do you get comfortable that the underlying business is returning to growth?  This transaction has made the stub a levered play on Windstream returning to growth.  If revenues continue the historical decline they will most likely end up in distress due to the negative operating leverage working against them as revenues decline.  At some point the coverage ratios will decline and there may be stress on the payment to the REIT.  I am just having a hard time understanding how adding more leverage via the REIT payments makes sense for declining revenue business.  I have also told myself to stay away from leveraged businesses that have declining revenues/cash flows as I have rode a few of these to 0 on the way to BK.

 

This is a nice leveraged play if Windstream and other LECs return to revenue and cash flow.  I am just having a hard time seeing it with Windstream.

 

Packer

 

I definitely agree that it is dangerous to get involved in a leveraged businesses with declining revenues/cash flows (see WTW for example!). Windstream has struggled due to losing a lot of high margin legacy business and not growing other businesses quickly enough to offset those revenues -- and suffering the double whammy of declining revenues and declining ebitda margins due to business mix. I don't have faith in Windstream returning to growth, but I think that as the declining legacy businesses become a smaller and smaller part of the pie the revenue decline will slow down (2% or less) while maintaining ~34% ebitda margins or in a bullish case hold both revenue and ebitda margins steady. I think in both cases you do pretty well, and in the bullish case you will do extremely well. 

 

There are 2 pieces of the puzzle that are crucial to my thesis. 1) Windstream is able to maintain ~34% ebitda margins over time even with slowly declining revenue and 2) Current Capex is elevated due to certain program capex projects -- such as the long haul express network.  I expect that if their growth efforts aren't working they can bring capex down to as low as $650-$700MM annually.

 

I think the market is not appreciating the fact that Windstream is holding on to 20% of the REIT -- until they liquidate to further reduce debt.

 

I also suspect that during the last conference call, given the new CEO, they may have been extra conservative with guidance. 

 

 

The problem with the parent is the declining cash flows and revenues.  Additionally the company will have to pay capex expenses for CSALs assets (which is a problem from both CSAL and WIN for different reasons).  This means less EBITDA is converted to FCF than a typical RLEC.  The second problem is this year CSAL is paying 50 million in CAPEX for WIN.  That won't continue, although the interest savings from selling its 20% of the REIT will make up for that.  But it's important that that is not double counted.  Debt to Unlevered FCF is something like 12x and 10x after the sale of CSAL stock.  Capex is roughly 10-20% lower than D&A for WIN historically (if you include CSAL D&A which WIN has to pay capex for) that gets to around 850-900 million on the low end.  Hard to see how they can get down to 650-700 million in capex

 

Hmmm I thought that Windstream has the Right to make CSAL pay up to $50 million of CapEx annually -- but that Windstream's payment to CSAL would increase (8% of $50MM) due to that contribution. In 2013, they had recurring cap ex down to $623MM with $190MM of Fiber to the tower (New capital projects) and some integration capex.

[cameronfen]

How do you get comfortable that the underlying business is returning to growth?  This transaction has made the stub a levered play on Windstream returning to growth.  If revenues continue the historical decline they will most likely end up in distress due to the negative operating leverage working against them as revenues decline.  At some point the coverage ratios will decline and there may be stress on the payment to the REIT.  I am just having a hard time understanding how adding more leverage via the REIT payments makes sense for declining revenue business.  I have also told myself to stay away from leveraged businesses that have declining revenues/cash flows as I have rode a few of these to 0 on the way to BK.

 

This is a nice leveraged play if Windstream and other LECs return to revenue and cash flow.  I am just having a hard time seeing it with Windstream.

 

Packer

 

I definitely agree that it is dangerous to get involved in a leveraged businesses with declining revenues/cash flows (see WTW for example!). Windstream has struggled due to losing a lot of high margin legacy business and not growing other businesses quickly enough to offset those revenues -- and suffering the double whammy of declining revenues and declining ebitda margins due to business mix. I don't have faith in Windstream returning to growth, but I think that as the declining legacy businesses become a smaller and smaller part of the pie the revenue decline will slow down (2% or less) while maintaining ~34% ebitda margins or in a bullish case hold both revenue and ebitda margins steady. I think in both cases you do pretty well, and in the bullish case you will do extremely well. 

 

There are 2 pieces of the puzzle that are crucial to my thesis. 1) Windstream is able to maintain ~34% ebitda margins over time even with slowly declining revenue and 2) Current Capex is elevated due to certain program capex projects -- such as the long haul express network.  I expect that if their growth efforts aren't working they can bring capex down to as low as $650-$700MM annually.

 

I think the market is not appreciating the fact that Windstream is holding on to 20% of the REIT -- until they liquidate to further reduce debt.

 

I also suspect that during the last conference call, given the new CEO, they may have been extra conservative with guidance. 

 

 

The problem with the parent is the declining cash flows and revenues.  Additionally the company will have to pay capex expenses for CSALs assets (which is a problem from both CSAL and WIN for different reasons).  This means less EBITDA is converted to FCF than a typical RLEC.  The second problem is this year CSAL is paying 50 million in CAPEX for WIN.  That won't continue, although the interest savings from selling its 20% of the REIT will make up for that.  But it's important that that is not double counted.  Debt to Unlevered FCF is something like 12x and 10x after the sale of CSAL stock.  Capex is roughly 10-20% lower than D&A for WIN historically (if you include CSAL D&A which WIN has to pay capex for) that gets to around 850-900 million on the low end.  Hard to see how they can get down to 650-700 million in capex

 

Hmmm I thought that Windstream has the Right to make CSAL pay up to $50 million of CapEx annually -- but that Windstream's payment to CSAL would increase (8% of $50MM) due to that contribution. In 2013, they had recurring cap ex down to $623MM with $190MM of Fiber to the tower (New capital projects) and some integration capex.

 

You are right about the option (8% for 50MM), but I consider that a wash bc it will cost WIN in higher rent over time will make up for it.  This year though CSAL is paying 50 million no strings attached, so managements guidance for 850 million in capex for 2015 is low by 50 million.  I'm not so familiar with the fiber project in 2013, so I don't know if it was a new market or not, but it sort of reminds me about the story regarding Berkshire Hathaway when it was just a textile mill.  The traveling salesman would tell management that the machine he was selling will increase ROI by 20%.  So they bought it.  Of course that's what the salesman told to everyone else, so everyone had a machine, and the industry was back in the same place it started.  So I would be skeptical about whether the fiber capex is really growth capex, or upgrades that they have to buy in order to keep up with competitor's offerings. 

[krazeenyc]

I guess you guys are right. The declining revenue and FCF is too scary. I'm out (but unfortunately I did not wait until right now to sell lol).  Owning Windstream makes sense, if I have to have added insight that would make me believe that Windstream can maintain ebitda margins and or keep revenues steady and I don't.

[JAllen]

I'm having a hard time wrapping my head around what's going on with WIN and wanted to post some thoughts and hopefully get feedback about how I’m wrong.

 

So as you know, I've worked on WIN since January or so, and after the spin we sold both our CSAL and WIN positions, just because I was working on other things at the time and wanted to regroup/review.  As a result, this post is not clouded by an existing position I’m trying to work my way out of or something like that.

 

Now the spin has occurred, CSAL is trading at ~12.5x EBITDA, which is a bit more than I expected, and we have WIN, whose price has declined quite a bit.  Especially post-results which seemed to indicate continued weakness but not an acceleration in that weakness.  WIN's EV is something like $5.3 billion or so (the capital leases are liabilities but not debt in my eyes because there is no principal payment due at the end).

 

WIN is going to generate approximately $1.25 billion of EBITDA this year, which assumes a lower than guided margin and a continued 3% revenue decline.  It obviously deducts the CSAL payment as an expense, which I believe is the right way to look at it: don't count the lease liability as debt, but definitely deduct the payment as an expense, which is really what it is.

 

So $5.3 billion EV and $1.25 billion of cash flow is about 4.25x.  And as most of you know, this is quite a bit less than what other comparable telecoms, with a similar mix of business trade for, such as CTL.  It's the cheapest I know of telecoms trading for, except for OTEL, but more about that later.  Even LICT trades higher than this despite it being an illiquid OTC stock (though its overall revenue is slightly increasing).

 

 

What really got me thinking is that WIN could be an attractive stock to own if you think it could trade to 5x or maybe 5.5x.  This is because the equity is such a small part of the capital structure, about 16% right now.  It wouldn't take much of a change in sentiment, slowing revenue declines, or a simple re-rating to 5x to cause a drastic change in the stock price. 

 

So I bought a few calls after drafting a similar post a few weeks ago.

 

And then someone got in touch with me about WIN and CBB, actually.  He reminded me that fiber businesses trade for 13-16x.  I can't find a fiber or data center business that trades for less than 13x EBITDA.  Obviously this range of multiples is quite a bit different than where WIN is trading (even if you call the capital lease debt) in total.  Note that I’m not saying WIN as a whole should trade for anything like this.  So I got to thinking, what if WIN has a valuable fiber/data center business hidden inside there with that nasty slightly declining legacy business.

 

And it turns out, WIN does have a fiber business.  WIN retained about 55,000 route miles of fiber and all of their data centers - all 27 of them - from the CSAL spin.  I summed the square footage for the 18 DCs on WIN's website that disclose the square footage, which got me to 443,000 square feet of DC space that WIN owns.  This excluded 9 data centers where they don’t list the square footage.  If you assume the remaining 9 DCs  have one-third the average space per DC, then WIN owns about 550,000+ square feet of data centers.

 

I've got four data center comps that are purely DCs, and they trade for an average of $1,600 per foot, a minimum of $800/foot and an average of 6.4x revenue and a minimum of 5.7x revenue.

 

 

The pure fiber comps I have trade for more than 5x revenue and well into double-digit EBITDA multiples. None trade cheaper than 13x EBITDA.

 

WIN breaks down enterprise/SMB only - which totals $3 billion of revenue and doesn't break out how much is from fiber/DCs and how much is from providing legacy phone services to companies. You can deduce the amount of revenue that doesn’t come from “voice, long distance and miscellaneous revenues“ by doing some algebra on the disclosed growth rates of the entire enterprise and small business segment (see page F-7 in 2014 10-K [link at bottom of post]).  Doing so gets you something like $1.5-$2 billion of this higher value revenue (closer to $2B but I'm trying to be conservative here).  I should add that this portion of the enterprise/SMB segment grew at something like 25% in 2014 but appears to have flattened out in Q1.

 

As a result, if you can't see it already, WIN's modern fiber/DC business could be worth almost as much as the current entire EV of the company, and if you were optimistic about it or thought it was worth what others trade for, it could be worth quite a bit more than the entire EV of the company.

 

If you think WIN has anything like these kind of valuable assets, it also changes the debt situation as well.  I believe WIN could readily sell a subset of these assets to a number of players, it seems, making what I believe is already a "manageable" debt situation more like a "totally fine" debt situation.

 

 

I mentioned that WIN is priced cheaper than all other U.S. telecoms - but there's at least one exception, and that's OTEL.  OTEL, I believe is down around 4x.  Unfortunately OTEL is declining more rapidly than WIN and it has zero or almost zero modern revenue at all.  OTEL was late in realizing that telecom as a whole needed to transition.  WIN was making billion dollar fiber/data center acquisitions back in 2011, like Paetec.  OTEL acquired a small managed hosting business last year, but if I recall correctly, it had less than $1 million of revenue and is about 1% of OTEL’s revenue still.  So OTEL justifiably trades at a cheaper valuation.  I should mention that OTEL has a massive maturity in one year or so and probably has zero secured debt capacity.  WIN has no immediate maturities and has at least some secured debt capacity.

 

If you think about it, placing a 4.25x multiple on the entire business basically says the entire thing is crappy and dying.  It leaves little room for any part of WIN being worth a premium multiple.  If the market is indeed aware of WIN’s valuable fiber business, than it is placing a low single-digit multiple on it, which is different than what it’s doing for others.

 

So can someone help me understand how I'm wrong here?  What am I missing?  How are WIN’s fiber route miles worth a fraction as much as others’?  The value, if I’m right about this, is primarily about fiber, not DCs, BTW.

 

 

As a bit of a cherry on top, WIN mentions in the recent conference call that they own the fifth largest fiber network in the country.  I’m not sure if that includes the CSAL miles, but regardless if it does, they control the fifth largest network and the CSAL portion is basically a fixed cost for fifteen years. 

 

I looked to find the four larger players and they appear to be:

 

• LVLT: 200,000
  

• Comcast: 161,000
  

• CCOI: 86,000
  

• ZAYO: 83,000
  

• WIN: 55,000
  

The above is probably wrong somewhere, but it is intended to give you an idea of the fiber WIN owns (if not controls).One thing to get started with is the below info sheet about LVLT’s acquisition of TW Telecom, whereby LVLT acquired 34,000 route miles for $7.3 billion.  This comes out to $214,000/mile.  They also paid 4.5x revenue.  It should be noted that my estimate of WIN’s fiber business is approximately this size by revenue and potentially larger on a route mile basis.

http://investors.level3.com/files/doc_downloads/Other%20Downloads/LVLT-TWTC_Fact%20Sheet_2014-06-16-2.pdf

 

 

Here’s telecomramblings.com talking about cost to build fiber these days and some acquisition metrics:

 

 

http://www.telecomramblings.com/2015/05/industry-spotlight-bank-street-on-last-weeks-fiber-ma-part-1/

 

2014 10-K: http://www.sec.gov/Archives/edgar/data/1282266/000128226615000010/a201410k.htm#s0E13EC17E59125B4D7D0A4A56A229EC9

[cameronfen]

@jallen

 

Sounds like you did a lot more research then me, however the one thing I would emphasize is that the win parent deserves a lower ebitda multiple than the typical ilec.  The reason is bc they have to pay csal's capex which reduces ebitda conversion to FCF.  This extra capex could be significant and by my calculations makes the company very nearly FCF negative.  Now win might still have some value but idk what that is. 

[Packer16]

Winstream has increased its risk by spinning off CSAL. This can be seen in the WIN bonds who are trading in the 7 to 8% yield range (CCC implied credit).  If WIN can reverse the revenue/EBITDA decline this will be a winner.  If the decline continues, then most likely WIN will end up in distress along with CSAL.  Given the fixed nature of WIN's costs (including the payment to CSAL) a 3% decline in revenues will result in a much larger decline in EBITDA and FCF. 

 

In the high yield world the change in direction of coverage can be as important as the amount of coverage.  Today WIN has adequate coverage but the real question is will that coverage exist in 5 years.  The current trend is not good.  For a company like WIN, the best place to buy in the capital stack is the debt as the equity is an in the money option today on firm's value that is declining.  But the real question is can WIN stop the revenue/EBITDA decline.  I personally have more confidence in LICT (where this has happened) than WIN (where it has not happened yet).

 

As to the fiber companies, most of their value is in their growing cash flow streams.  I am not sure if WIN's fiber is also growing.  The hosting assets are ones that may have a seperable value.  However, the debt has a claim on all of these assets before the equity gets any residual.  I would keep an eye on the bonds.  If the yields decline to 6% or below then WIN's plan will be working.  Just my 2 cents.

 

Packer

 

 

[RhubarbXIV]

Bill Mitchell of Spinoff and Reorg fund suggested shorting CSAL against WIN to stub out the remainder for under a buck per share of WIN. More details in this past week's Barrons.

 

http://online.barrons.com/articles/s-p-500-hits-a-new-high-1431747208

 

In the spirit of disclosure, I'm an investor in his fund, but this seems like a pretty interesting idea. High-level you can end up with a stub worth sub-$100m with ~$5b in revs. If you're the gambling type it might make for an interesting special situation. Easy to borrow CSAL, but that's probably due to the ~9% yield.

 

Looking at their bonds since the announcement of the spin it looks like quite a few folks are thinking the equity gets a goose egg (see Packer's prior post or http://finra-markets.morningstar.com/BondCenter/), so enter at your own risk.

 

One thing I think is interesting is that management of WIN seems pretty set on selling out its CSAL over the next eleven months which, seeing 20% of the shares on the offer, might help to put a lid on the price of CSAL even in the face of yield-chasers.

 

Anyhow, just thought I'd mention it. If fiber can hold WIN's head above water, this is a home run, in basically every other case this is a slow-motion train crash. I don't have much faith in WIN's management, either, but beggars can't be choosers.

 

[JAllen]

Just FYI to the board: I found out that the remaining fiber Windstream "owns" is not actually fee-owned, the fiber is primarily IRUs, or indefeasible rights of use, which is basically leased access to fiber.

 

 

They wouldn't/didn't share much about duration or payment terms so there's not way to determine how much these IRUs are potentially worth.

 

 

But I concluded they're not worth much...

[bargainhunter]

Windstream just sold their data center unit for $575 mn. That's over 80% of their market cap. Remember they are also yet to monetize their CSAL stake, which should net another $600 mn odd (possibly quite a bit more, as WIN has said they will wait for the right timing to sell). That creates some pretty impressive potential for debt retirement. They already have a 15% share buyback in authorization. Anybody else nibbling at this one? If revenues show a bit of stability over the next couple of quarters (and I realize this is probably the biggest concern) this one seems like a fairly asymmetric bet.

[JayGatsby]

I couldn't get comfortable with the FCF after capex. If I remember right , LTM EBITDA - CSAL lease - PF Interest - Capex was pretty close to 0. Would really like to see some material FCF to delever. I know some of their capex was considered "growth", but I wasn't close enough to the industry to be able to differentiate.

 

Are there any strong businesses here that really have the ability to grow over time or is this a trade to pick up a 90% levered, 95 cent dollar?

[bargainhunter]

I couldn't get comfortable with the FCF after capex. If I remember right , LTM EBITDA - CSAL lease - PF Interest - Capex was pretty close to 0. Would really like to see some material FCF to delever. I know some of their capex was considered "growth", but I wasn't close enough to the industry to be able to differentiate.

 

Are there any strong businesses here that really have the ability to grow over time or is this a trade to pick up a 90% levered, 95 cent dollar?

 

Good questions, which I don't yet have great answers for. The company claims half its capex ($400 million or so) is discretionary. They are in the final stages of rolling out a big speed upgrade to their broadband customers which finally makes them competitive (now offering faster speeds) with the cable insurgents that have been eating away at their revenues. WIN says customers are signing up for these faster speeds, but we still need to see evidence of this in the numbers.

 

As for FCF, if they use the $575 mn from the sale of the data center unit to retire debt (with coupons ranging from 6.4 to 7.9%), we have an extra $40 million a year. Throw in another $50 mn or so of FCF after the sale of their CSAL stake. I don't think we need their business to grow strongly to make this a big winner; they merely need to stabilize the declines. Revenue guidance was revised up (marginally) last quarter. Next earnings call will be very interesting.

[awindenberger]

I couldn't get comfortable with the FCF after capex. If I remember right , LTM EBITDA - CSAL lease - PF Interest - Capex was pretty close to 0. Would really like to see some material FCF to delever. I know some of their capex was considered "growth", but I wasn't close enough to the industry to be able to differentiate.

 

Are there any strong businesses here that really have the ability to grow over time or is this a trade to pick up a 90% levered, 95 cent dollar?

 

Good questions, which I don't yet have great answers for. The company claims half its capex ($400 million or so) is discretionary. They are in the final stages of rolling out a big speed upgrade to their broadband customers which finally makes them competitive (now offering faster speeds) with the cable insurgents that have been eating away at their revenues. WIN says customers are signing up for these faster speeds, but we still need to see evidence of this in the numbers.

 

As for FCF, if they use the $575 mn from the sale of the data center unit to retire debt (with coupons ranging from 6.4 to 7.9%), we have an extra $40 million a year. Throw in another $50 mn or so of FCF after the sale of their CSAL stake. I don't think we need their business to grow strongly to make this a big winner; they merely need to stabilize the declines. Revenue guidance was revised up (marginally) last quarter. Next earnings call will be very interesting.

 

I bought a small position in late June around $7.50 and wish I'd added more in late July under $5. With this sale they should have no trouble completing their $75mil stock buyback program, which would reduce the share count by almost 10% at current prices. That would allow them to increase the dividend by 10% next year with no change in total dividends paid. Long term shareholders have clearly suffered a lot, but the stock seems poised for good total returns going forward.

 

 

[bargainhunter]

I thought the quarterly report was really positive. The lack of market reaction is a little baffling. Am I missing something?

 

- Executed $20 mn in share buybacks with another $50 mn at least to come

- Refinanced $290 mn in high coupon debt - will save $20 mn in annual interest expenses. And there is more of this to come (they have more capacity in their revolver)

- Most importantly, revenues are stabilizing after years of declines. Sequential growth over Q2, even without the CAF-2 revenues from the government.

- Using data center sale ($575 mn) to retire more debt, and accelerate upgrading of broadband network (increasing competitiveness vs cable)

 

I'd be surprised if they are not able to guide for flat to slightly increasing revenues and OIBDA in 2016. What would that mean for a stock that generates enough cash flow (ex "discretionary" capex) to buy back its entire free float in less than two years?

[kab60]

How do you get comfortable that the underlying business is returning to growth?  This transaction has made the stub a levered play on Windstream returning to growth.  If revenues continue the historical decline they will most likely end up in distress due to the negative operating leverage working against them as revenues decline.  At some point the coverage ratios will decline and there may be stress on the payment to the REIT.  I am just having a hard time understanding how adding more leverage via the REIT payments makes sense for declining revenue business.  I have also told myself to stay away from leveraged businesses that have declining revenues/cash flows as I have rode a few of these to 0 on the way to BK.

 

This is a nice leveraged play if Windstream and other LECs return to revenue and cash flow.  I am just having a hard time seeing it with Windstream.

 

Packer

That was a nice call, Packer. Saved me a bunch. Anyway, what do you think about Uniti now? Isn't this somewhat similar to Sears/Seritage where even in a bankruptcy the REIT should do okay since the lease is senior to the rest of the obligations?

[krazeenyc]

How do you get comfortable that the underlying business is returning to growth?  This transaction has made the stub a levered play on Windstream returning to growth.  If revenues continue the historical decline they will most likely end up in distress due to the negative operating leverage working against them as revenues decline.  At some point the coverage ratios will decline and there may be stress on the payment to the REIT.  I am just having a hard time understanding how adding more leverage via the REIT payments makes sense for declining revenue business.  I have also told myself to stay away from leveraged businesses that have declining revenues/cash flows as I have rode a few of these to 0 on the way to BK.

 

This is a nice leveraged play if Windstream and other LECs return to revenue and cash flow.  I am just having a hard time seeing it with Windstream.

 

Packer

That was a nice call, Packer. Saved me a bunch. Anyway, what do you think about Uniti now? Isn't this somewhat similar to Sears/Seritage where even in a bankruptcy the REIT should do okay since the lease is senior to the rest of the obligations?

 

Packer is not always going to be right... but when it comes to leveraged telcos -- I'm going to trust his expert opinion over my own lol! Packer has been one of the very best resources on this board -- really helped me learn a ton about the leveraged telcos/Cable companies. And not just learn, but make a lot of $$ and avoid losing $$ as well. Thanks Packer.

[Packer16]

This is a situation to keep an eye on.  It appears that WIN has had revenue growth for the past 2Qs but the interest expense is equal to EBITDA-Cap ex, so the situation is not sustainable.  We are going to have some sort of restructuring & in that situation who knows who gets what.  The seniority of the assets lease will not be enforced as it will be a negotiated settlement.  Unless I missed something, this is different from SHLD/Seritage and SHLD bondholders received compensation from Seritage versus that not being the case here.  I would wait here to see what plays out.  Just mu 2 cents.

 

Packer