Fiber Meets REITs: Windstream’s High-Tech Spinoff

Can advanced communication networks form the basis of a REIT? Last summer, Windstream Holdings decided to find out.

Can advanced communication networks—copper, and increasingly, fiber optics as well—form the basis of a REIT?  Last summer, Windstream Holdings decided to find out.

On Jan. 21, Little Rock, Ark.-based Windstream said that it had received approvals from state public service commissions for its planned spinoff, which will be named Communications Sales & Leasing Inc. (CS&L). Completion of the state process followed a favorable private letter ruling from the Internal Revenue Service.

“Securing these regulatory approvals is an important milestone in our work and affirms the compelling benefits of the transaction to consumers and businesses,” said Francis Frantz, a Windstream director who will serve as chairman of CS&L’s board, in a statement.  “With the state regulatory approval process complete, we are focused on executing the final steps of the transaction.”

Windstream will spin off assets that include its fiber and copper networks and other real estate as CS&L. The new REIT will then lease the assets to Windstream through a long-term triple-net deal with an initial payment estimated at $650 million per year.

Windstream will operate and maintain the assets, which provide communications and other tech services to consumers. According to the company, customers will see no change in their rates, scope or terms of service as a result of the transaction, and Windstream will continue to have responsibility for meeting regulatory obligations.

For its part, CS&L will focus on expanding and diversifying its assets and tenants through future acquisitions. Assuming that customary conditions are met, the transaction is expected to close during the first half of the year.

At the time the plans were unveiled, Windstream CEO Jeff Gardner explained that the deal will make the company “a more nimble competitor in today’s increasingly dynamic communications marketplace and accelerate our deployment of advanced communications services.”

An important aspect of the restructuring is that Windstream has promised to provide bandwidth of 10 megabits per second to more than 80 percent of its customers by 2018. It will also double its 24 Mbps speed tiers by that time, offering the service to more than 30 percent of its customers.

A special meeting of stockholders is scheduled for Feb. 20 in conjunction with the REIT spinoff to approve a 1-for-6 reverse stock split. Also on the agenda for that meeting is an amendment to the certificate of incorporation for Windstream Corp., a subsidiary of Windstream Holdings, which would facilitate the conversion of Windstream Corp. into a limited liability company.

So far no other major owner of fiber telecom infrastructure has followed suit, but that’s a possibility. After Windstream announced its plans last July, Credit Suisse analysts Joseph Mastrogiovanni and Michael Baresich wrote in a report that AT&T and Verizon are looking at a similar structure, but that action is unlikely in the near term. For Windstream, the spinoff would generate additional free cash flow from the tax shield of the REIT structure and would yield reduced capital costs through improved credit ratings.

For an update on the expanding use of fiber technology in commercial properties, be sure to read “Strike Up the Bandwidth” in the February issue of CPE.