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Windstream Bids to Take Over PAETEC
| Aug 1, 2011 | Network Access and VPN Services
| Analyst: Brian Washburn
Event Summary
August 1, 2011 - Windstream plans to acquire PAETEC in an all-stock transaction valued at $891 million, plus about $1.4 billion assumption of debt. The combined company will have about $6.1 billion annual revenues and $2.4 billion operating income before depreciation/amortization. It combines national networks with customers in 46 states, 100,000 route-miles of fiber all totaled, and offers additional services including Ethernet, data center and managed services.
Quick Take
Analytical Summary
• Current Perspective: Positive on Windstream’s proposed purchase, because the carrier derives direct and indirect financial benefits from its acquisition of PAETEC, and seals its role as a provider of nationwide network services. While Windstream executives did not play up PAETEC's corporate culture in their discussions of the acquisition, they appear to recognize the importance of keeping the company intact to benefit from its continued aggressive sales success: Its operational synergy plans did not note major workforce reduction plans.
• Vendor Importance: Moderate to Windstream, because the company chose to acquire PAETEC to build up its business services strategy, rather than as a reaction to market forces. After the acquisition's close (anticipated within the next six months), Windstream estimates it will derive about 70% of its revenues from business and broadband services – a big difference from rural LECs.
• Market Impact: High to business services competitors, because even if Windstream's acquisition keeps PAETEC intact, it will reshape the CLEC as a competitive carrier. Windstream has its own regional CLEC and fiber resources, as well as national IP services. Windstream will need to combine and rationalize its assets; competitors may take the opportunity to spread uncertainty over what will happen to the customer-centric reputation that PAETEC has built up over the years.
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Competitive Strengths and Weaknesses
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Windstream to acquire PAETEC
Transaction is another significant step in company's transformation
LITTLE ROCK, Ark. - August 1, 2011
- Combination creates a formidable national telecommunications provider with more than $6 billion in total revenue
- Accelerates revenue and free cash flow growth profile with approximately 70 percent of revenues from business and broadband services
- Creates nationwide network with approximately 100,000 fiber route miles
- Enhances capabilities in key strategic growth areas including metro fiber, Ethernet, data centers and managed services
- Expected to provide approximately $100 million in annual pre-tax operating cost synergies and tax benefits with a net present value of approximately $250 million
- Expected to be accretive on a free cash flow per share basis, excluding merger and integration costs, in the first year following closing
- Slightly de-leveraging after synergies
Windstream Corp. (Nasdaq: WIN) has entered into a definitive agreement to acquire PAETEC Holding Corp. (Nasdaq: PAET), based in Fairport, N.Y., in a transaction valued at approximately $2.3 billion.
"This transaction significantly advances our strategy to drive top-line revenue growth by expanding our focus on business and broadband services," said Jeff Gardner, president and CEO of Windstream. "The combined company will have a nationwide network with a deep fiber footprint to offer enhanced capabilities in strategic growth areas, including IP-based services, data centers, cloud computing and managed services. Financially, we improve our growth profile and lower the payout ratio on our strong dividend, offering investors a unique combination of growth and yield."
"Both PAETEC and Windstream are built on a customer and employee-focused culture. Together, with far denser network assets, an expansive fiber infrastructure, and larger data center footprint, I believe our brightest days are ahead," said Arunas A. Chesonis, chairman and CEO, of PAETEC. "Our combination now creates a new Fortune 500 company with the financial strength and scale to compete and win against any other provider in the industry. I'm confident that this transaction will deliver substantial long-term value for our customers, employees, and shareholders."
PAETEC shareholders will receive 0.460 shares of Windstream common stock for each PAETEC share owned under the terms of the agreement which was approved by the boards of directors of both companies. Windstream expects to issue approximately 73 million shares of stock valued at approximately $891 million, based on the company's closing stock price on July 29, 2011.
Windstream also will assume or refinance PAETEC's net debt of approximately $1.4 billion at the time of closing. PAETEC stockholders are expected to own approximately 13 percent of the combined company upon closing of the transaction.
Significant Synergies and Tax Attributes Drive Free Cash Flow Accretion
The transaction is expected to be accretive to free cash flow per share, excluding merger and integration costs, in the first year following the closing. The transaction is expected to generate annual pre-tax operating cost synergies of approximately $100 million and capital expenditure savings of approximately $10 million, which are expected to be fully realized by the third year after closing. Windstream expects to incur merger and integration costs of approximately $50 million in operating expense in the first year following the closing and approximately $55 million in capital expenditures over the first three years following closing.
The transaction will allow annual PAETEC net operating loss utilization of approximately $130 million in each of the first 5 years. The tax benefits will have an estimated net present value of approximately $250 million.
Enhanced Scale and Improved Business Mix
The combined company would have had $6.1 billion in total revenue and about $2.4 billion in adjusted operating income before depreciation and amortization, which excludes non-cash pension expense, restructuring charges and stock-based compensation expense, on a pro forma basis for the last 12 months ended March 31, 2011. Business and broadband revenues would have comprised approximately 70 percent of total revenue.
The new company will serve business customers in 46 states and the District of Columbia and maintain approximately 100,000 fiber route miles across the country. Windstream will offer data center services across the United States and have improved capability to serve multi-location business customers.
Strong Balance Sheet and Liquidity
Windstream will continue to have a strong balance sheet and liquidity. The transaction will be slightly deleveraging, including synergies.
Committed Financing
Windstream has received $1.1 billion in committed financing in connection with the acquisition, which financing would be required if Windstream refinances the assumed debt.
Dividend Practice
Windstream pays an annual dividend of $1 per share and its board of directors expects to continue the current dividend practice after the transaction closes.
Approvals and Anticipated Closing
The transaction is expected to close within six months, subject to certain conditions, including necessary approvals from federal and state regulators and PAETEC shareholders.
PAETEC Overview
PAETEC is a competitive local exchange carrier and provides telecommunications services primarily to business customers in 46 states and the District of Columbia. The company operates seven data centers in the U.S. and owns approximately 36,700 route miles of fiber in portions of 39 states and the District of Columbia.
PAETEC has approximately 5,000 employees, including about 875 in the Rochester, N.Y. area. The company was founded in 1998.
Additional Information
Stephens Inc. and J.P. Morgan Securities LLC are acting as financial advisers and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal adviser to Windstream in the transaction.
BofA Merrill Lynch and Deutsche Bank Securities, Inc. are acting as financial advisers and Hogan Lovells is acting as legal adviser to PAETEC in the transaction.
