When Windstream Holdings Inc. spins off some of its assets into a new company -- a real estate investment trust -- the new entity will be positioned to establish similar deals with other telecommunication companies looking to shed some of their infrastructure, industry analysts say.
Analysts are divided on the effect Windstream's plan will have on the industry, but they said similar telecommunications companies are considering following in the Little Rock company's footsteps.
"Theoretically, they will be the experts in the industry on how to manage ... these assets," said Frank Louthan, an analyst with Raymond James & Associates. "Why not sell infrastructure to this new spinoff from Windstream rather than replicate it all yourself."
Tony Thomas, Windstream's chief financial officer and future chief executive officer of the unnamed real estate trust, said forming similar relationships with other companies would be one way that the investment trust, also known as a REIT, could grow.
"We hope that the REIT will be seen as an attractive vehicle," he said.
Windstream announced in July that it would turn its copper and fiber networks, along with other assets, into a real estate investment trust in 2015, pending regulatory approval. Windstream provides voice and data services to businesses. It also offers broadband Internet and phone services in rural areas.
The Internal Revenue Service has already approved Windstream's plan, but the company still needs the consent of state regulatory agencies.
Windstream has said the tax-free spinoff will reduce its debt by about $3.2 billion and that the company would still control the property through a long-term lease of $650 million per year.
Thomas said the new company has already started to fill its 25 positions and will have offices in two locations, including Little Rock. The second location has not been determined nor has location of the new company headquarters, he said.
Shares of other telecommunication firms soared when Windstream announced its plan. Analysts said real estate investment trusts give telecommunications companies a new way to generate value from their networks.
By spinning off its assets, Windstream will be able to invest in its own network, Thomas said.
"I think it's a very unique way that both allows for the company to provide long-term return to shareholders and at the same time allow it to expand capital projects," said Barry McCarver, an analyst for Stephens Inc., which was a financial adviser on the transaction.
Historically, real estate investment trusts are comprised of property such as shopping malls, apartments and office buildings. The IRS' approval of Windstream's plan to designate its copper lines and fiber-optic networks as real estate was significant, analysts said.
"But over the last three years, there's been a pretty dramatic expansion of the REIT category," said Robert Willens, a tax consultant who writes the Willens Report. "It has been fueled by the fact that the IRS has been willing to acknowledge these other assets."
When the spinoff is completed, Windstream's annual dividend will drop from $1 to 70 cents per share. Windstream will pay 10 cents and the trust will pay 60 cents of the dividend.
Windstream's ability to maintain the $1 dividend had been a concern for investors in recent years as the company's profit margin tightened.
"Being a REIT is a good thing because REITs do not pay taxes on their earnings as long as those earnings are distributed to shareholders," Willens said.
The real estate trusts get a tax deduction on the dividends they pay to shareholders. "So, if it pays all income to shareholders, it won't have any taxable income left," Willens said.
While the new real estate investment trust's lease deal with Windstream will be exclusive, the new company also could buy assets from another telephone, cable television or Internet provider in a similar agreement, Thomas said.
The new company also could buy unused assets from a provider that it could lease to someone else, he said.
The sale of assets by other telecommunication companies to Windstream's trust is most likely to appeal to smaller companies that might struggle to develop a trust of interest to investors, analysts said.
And larger companies are less likely to want to "become dependent on a company controlled by [Windstream]," Willens said.
"The rest of the industry is definitely in the process of studying what Windstream," is trying to do, he said.
SundayMonday Business on 09/07/2014