Raising Windstream’s Price Target By A Dollar to $9.5 Following Telecom Assets Spin-Off Into REIT

Technology, Telecom Services - Domestic, WIN, Windstream
Technology, Telecom Services - Domestic, WIN, Windstream

While Windstream (WIN, Neutral) spinning off few of its telecom network assets into publicly traded REIT subsequent to acceptance of a Private Letter Ruling from IRS, it has sparked various U.S. telecom carriers while investors gamble on more REIT disclosure will done. The spinoff will include its fiber – copper networks, electronics (switches, routers etc) and additional real estate.

Company will pay $650 million yearly in rent which it expects to pull out $3.2 billion in debt from this spinoff (which is likely to complete by first quarter of 2015) with REIT lift $3.5 billion in debt. We believe that REIT will initiate further M&A activities in this industry which still have plenty scope.

The agreement is yet to be approved by regulatory authorities, but initially, it seems that company is well equipped to create large tax savings from this deal, rising cumulative free cash flow (which is 14 percent growth as per pro-forma base in FY14). We are still analyzing the projected deal and its effects for both – telecom firms and Windstream in industry. We agree that any deal that lower tax rate abiding law systematically will create large value for the industry.

Company reported $0.04 EPS for the first quarter, missing consensus estimate of $0.09 by $0.05. The company’s revenue of $1.50 billion was above consensus estimate of $1.47 billion. We reaffirm Windstream’s stock rating as ‘Neutral’ raising price target to $9.50 from $8.50 seeing potential downside of 5.3% from current price. Currently, shares are trading at $11.83, 36 times our 2014 EPS estimate and 31 times our 2015 EPS estimate. The stock surged nearly 5.4% on announcement of REIT spinoffs.


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