Last week had a few surprise moves, but perhaps the most puzzling one was Windstream’s plans to spin off a fiber REIT. We’ve had a little while to digest the idea, so I’m posing the question to Ramblings’ readership this morning. What do you think?
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This is a move by a desperate CEO who has run out of ideas about how to fix his company.
99.99% of companies don’t look at financial gimmicks & accounting tricks to create shareholder value. (Don’t let the “Availability Heuristic”* fool you.) I’m not saying creative accounting activities don’t take place at the end of every quarter in order to make the numbers b/c they do. But those activities are quite different from the type of structural change Windstream seeks to do.
(*Availability Heuristic is a cognitive bias that makes you believe an event is more common than it actually is b/c it gets disproportionate coverage in the media.)
A company with rich ideas and great execution skills does not turn to unconventional Wall Street banker tricks to unleash shareholder value. Instead they find ways to deliver greater value to their customers.
You can almost picture the Product Development meeting at the investment bank where this was pitched to i-bankers. The product development/financial engineering (PD/FE) team invites the telecom services, utilities and oil & gas groups investment bankers whose clients are perfect guinea pigs for this product. (Make no mistake about it, this REIT is a product, just like any telecom service your companies provide).)
The PD/FE team sizes the market opportunity, the banking fees and possible commissions for the hungry I-bankers. Most of the I-bankers dismiss it b/c their clients have enough industry related banking work going on to keep them busy. (I-banking revenues are soaring in 2014.)
The PD/FE explains that the idea guinea pig for this program is a company currently stuck in neutral without any fresh ideas.
The PD/FE team explains that the REIT structure will breed fresh life into a company, by freeing up cash (which it really won’t). They explain how to pitch it to the muppet CEO whose antsy board is unhappy with current performance and unimpressed with the future prospects.
The PD/FE team explains that their research shows that once one of the dominoes fall, others will follow. They again stress potential banking fees and commissions to the hungry I-bankers.
yes to this
The facts are Windstream has been a success story. In 2009, the company was a rural LEC with revenue decline in 3Q of -5.9% (on a base of over $3 billion of revenues) and only 38% of its business was broadband/business while 62% was regulatory and residential. Today, the company’s revenue mix is 73% broadband/business despite line loss trends and USF reform. Windstream is now a national communications player with a high quality data centers and a national fiber footprint. Top line growth is imminent. Yes, the value of tax savings is in the billions and multiple arbitrage yields potentially greater value. However, the new company can focus on infrastructure while Windstream can continue to enjoy the value of those assets while allocating more capital for growth. And, I assure you, that management team is among the best in the business.
Question for the group. If Telecom infrastructure (Fiber, Conduit, Copper, etc. up to and including the equipment used to provide lit services) is NOT most accurately defined as real estate…then what is it? From my vantage point, I’m surprised it’s taken us this long to see a first mover toward REIT status and would like to hear comments from the users here.
John, the pure definition of real estate is land and anything “permanently” attached to it so it is interesting that the IRS considered fiber and copper as permanent. What is also interesting to see is how local municipalities will now value this new category of real estate for property tax purposes.
Driving profits at the expense of tax dollars which are used to support our way of life is, in my opinion, the problem our great nation faces as super smart people con the government into making decisions which increase the support of the rich for public office people at the expense of those trying to make it through. To go against them means bad press and so people approve…at least those with no backbone. Most people have no idea what telecom does…ask someone about DAS and they think it’s some kind of new weapon…say Wifi and everyone knows what that means. Make no bones about it…budgets are set against tax revenue which means that the money needs to come from somewhere…and guess where it will come from…little ol peoples pockets. I think it’s a shell game…great companies support our way of life not play games to portray greatness in fear of honest fundamental business ethics outcomes. The rub is when this is found out the affects will be disastrous for those who go down the path – because it will change when gov’t gets there head out of…
Tell it all, brother
Management has been stable but their history is as a rural LEC. Kind of like the old RBOC’s. Whatever they do will amount to little as they have no imagination and are averse to risk. They acquired many companies that gave them a national presence but did not give them any idea what to do with it. Maybe they will listen to Randy.
Also, the company remains very fragmented. How do you tie it altogether?