Windstream Corporation (WIN), a fixed-line voice and DSL Internet service provider, has announced plans to acquire PAETEC Holding Corp. (PAET) for approximately $2.3 billion. The buyout of the personalized U.S. broadband services provider is in sync with the company’s broadband business expansion plan to improve its top line and streamline its cost structure.
Windstream is concentrating on data and business-solutions through several acquisitions that will spur its growth going forward. In 2010, the company had acquired NuVox, Inc., Iowa Telecommunications Services, Inc., Hosted Solutions Acquisition and Q-Comm Corporation.
Under the deal, PAETEC shareholders will get 0.46 Windstream shares for each PAETEC stock. Windstream expects to issue approximately 73 million of shares at approximately $891 million. In addition, the company will refinance PAETEC's net debt of $1.4 billion.
The deal, pending approval from federal and state regulators as well as PAETEC shareholders, is expected to be completed in six months. The boards of both companies have given their approvals. Upon completion, PAETEC stockholders would own approximately 13% of the combined company.
The combination will reduce Windstream’s operating expenses by about 100 million every year and capital expenditure by $10 million a year. The deal will allow Windstream to reduce its taxes by about $250 million by claiming PAETEC’s losses last year.
Further, the proposed transaction is expected to be accretive to free cash flow in the initial year itself. The transaction will help in deleveraging the company’s balance sheet, which currently stood at 3.6 times. Windstream is focusing on bringing its balance sheet back to historical levels of 3.2–3.4 times through EBITDA growth and modest debt reductions.
However, Windstream would incur roughly $50 million of merger and integration costs of in the first year and $55 million of capital expenditures over the first three years.
The combined company is estimated to generate annual revenues of $6.1 billion and adjusted EBITDA $2.4 billion. Upon completion, approximately 70% of the total revenue will stem from business and broadband revenues. The new Windstream will cover 100,000 fiber route miles in 46 states, up from the current 29 states.
Moreover, Windstream has been investing in fiber-to-the-cell, data center expansions and other success-based initiatives over the last couple of years. The PAETEC deal will expand the company’s fiber network to the West Coast, including Los Angeles and Seattle.
This will increase broadband availability to roughly 93% of customers, upgrade network and broadband speeds in under-served areas, which will result in attractive growth opportunities given greater demand in these areas.
We believe Windstream’s continued focus on expanding its broadband business via acquisitions and investments in fiber-to-the-cell projects and data center expansion are expected to fuel growth going forward. However, the company remains challenged by sustained erosion in voice access lines, due to stiff competition from cable and wireless operators.
We are currently maintaining our long-term Neutral rating on the stock. For the short term (1–3 months), the stock retains a Zacks #2 Rank (Buy).
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