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Bankrupt no longer, telecom sets course

by Andrew Moreau | July 12, 2020 at 2:48 a.m.

Windstream Holdings Inc. will get the rare opportunity for a do-over when it emerges from bankruptcy next month.

Strapped by bankruptcy oversight for the past 17 months, the telecom and software company will exit bankruptcy with new owners willing to invest to expand the business and a reorganization plan that should boost overall performance.

Windstream "will move forward with a stable capital structure, uninterrupted service, and an increased capability to compete to bring advanced services to consumers across the country," the company said in a filing asking the FCC to approve transferring control of the company to new owners led by Elliott Management Corp. of New York.

By all outward appearances it will be the same company: the same leadership team under President and Chief Executive Officer Tony Thomas and offering the same services in the same markets. Thomas was unavailable to comment for this article.

Most everything under the hood, the engine that will help drive performance, will change: new owners putting a new board of directors in place, no public reporting mandates, a favorable network leasing arrangement that is vital to success and a new capital structure that reduces debt and fosters more investment in key business segments.

Elliott Management Corp. would only supply a written statement to formally comment on its pending ownership of Windstream. The statement noted that Elliott plans to add Windstream to its private-equity portfolio, which includes notable names such as the recently acquired Barnes & Noble Inc.

"Elliott looks forward to Windstream's emergence from Chapter 11 bankruptcy and the opportunity to help the company execute on its business plan, which includes deploying a fiber-based network that will bring next-generation broadband services to businesses and household customers," said Johannes Weber, a portfolio manager at Elliott who will lead the team overseeing the Windstream investment.

Information for this story comes from bankruptcy and regulatory filings made by Windstream and its creditors and from interviews with officials familiar with Windstream and Elliot Management's strategy for the Little Rock company. They declined to speak on the record, noting Windstream's reorganization plan still needs final approvals and Elliott Management and other owners have not yet assumed equity control of the business.

Windstream's FCC filing outlines the process to rebuild the company post-bankruptcy.

The effort involves canceling all shares of outstanding stock and reorganizes the company under the plan approved by U.S. Bankruptcy Court Judge Robert Drain on June 25. That plan reduces Windstream's debt by more than $4 billion annually and notes it will operate post-bankruptcy as a private entity owned by its largest creditors.

In addition, the FCC must approve transfer of new ownership to Elliott Management and several other investment funds that have carried Windstream's debt. That debt will be converted to equity ownership in the new company.

Under the proposal being reviewed by the FCC, Elliott Management will own 40% of Windstream, Franklin Templeton will own 16% and no other entity will own more than 10% of the company. Elliott, which is privately held, has more than $40 billion in investments it manages across the globe; Franklin Templeton is a publicly traded global investment firm with more than $5 billion in revenue.

Elliot Management will appoint five members, including the chairman, to the new Windstream board of directors. The other investors will have five appointments and the CEO of the company will have a seat.

Elliott Management was an equity owner in Windstream before the company filed for bankruptcy in February 2019. Elliott strengthened its position through various parts of the debt structure during bankruptcy proceedings, buying distressed debt from other holders.

Elliott Management has a crucial role in Windstream's future, and the hedge fund already has been vital in shaping the reorganization plan, including helping negotiate Windstream's network leasing arrangement with Uniti Group Inc., according to sources familiar with bankruptcy proceedings and the development of the reorganization plan.

Capital investment is critical to Windstream's success in its two key business segments: rural broadband consumers and medium-sized businesses. The company refers to the segments as kinetic and enterprise, respectively, and they provide more than 90% of Windstream's revenues, which were $5.1 billion in 2019.

Kintetic contributed $2.1 billion in revenues and the enterprise segment was at $2.6 billion. Windstream's wholesale business is a third segment contributing to revenues, generating $360 million in revenue last year.

Both major segments demand continuous investments to remain competitive. Kintetic requires capital to deliver faster speeds to customers and has embarked on a fiber-to-the-home effort.

Enterprise needs capital investment to drive software development and deliver products and service to customers demanding easy-to-use communications platforms.

Elliott Management and other investors have committed to meeting Windstream's capital investment needs by "putting substantial new money into the business at emergence," said a source familiar with the plan, which outlines a $750 million investment from the parties.

As importantly, Windstream's approved reorganization plan discharges other debt obligations and will reduce the new company's debt by 50%, according to the FCC filing. "Thus, the proposed transaction will deleverage the company and place it on a sound financial footing," the filing said.

Reducing debt also frees up more capital to invest in the kinetic and enterprise business units.

Windstream's network settlement with Uniti – approved by Drain in May – requires Uniti to invest up to $1.75 billion through 2020 to improve the network Windstream uses to reach customers. Uniti also will pay Windstream about $490 million in cash and purchase fiber assets from Windstream for another $285 million.

Elliott Management played a leading role in brokering the settlement, said sources familiar with the agreement.

The firm was "intimately involved in the process of helping the two companies reach an agreement that the Windstream creditors would support," said a source familiar with Elliott's role. That Uniti settlement also requires Elliott Management to work with other entities and invest $245 million through purchase of 19.99% of Uniti's common stock.

Windstream's kinetic business serves more than 1 million customers and has recorded eight consecutive quarters of growth, including adding a record 18,000 new customers in the first three months of this year.

Windstream has "done a great job with limited capital resources providing upgraded speeds through some of their network," said the source familiar with Elliott's strategy for Windstream. Elliott and other investors, the source said, "will provide the ability to supercharge that with much higher speeds and improve that business."

The enterprise segment presents more of a challenge and is not as easy of a fix, according to sources familiar with Elliott's plans.

"A lot of the problems in that business have been on account of the bankruptcy process," the source said. "That was certainly a contributor to the performance of that business in the past year. But there is no doubt that business needs to be stabilized and turned around and, luckily, that's kind of what Elliott does."

Overhanging it all, however, is concern over just how long Elliott Management and the other investors will wait for returns on their investments. Private equity investors are not frequently known as patient investors.

Besides lowered debt and more money to invest in the company, emergence from bankruptcy presents Windstream's owners with several options to consider: everything from keeping the business intact and running it for several years as is, to carving it up and selling the business in pieces or going public again through an initial public offering process. The yet-to-be-appointed board also will have a say on those issues.

"As with any investment they make, all the options will be on the table," the source said, noting that Elliott's team will be actively engaged in evaluating the "appropriate exit path ... constantly throughout the course of the investment."

"They could be kept together and run together for a number of years, they could be IPOed back to the market, or they could be sold together or separately," said the source familiar with Elliot's approach. "There is no prescribed plan."

FCC approval, and a sign off from some state public utility commissions, are the last steps Windstream needs to exit bankruptcy. Current plans call on the company to be operating independently of bankruptcy supervision in August.

Once it exits bankruptcy, Windstream will operate as a privately held company. It will report quarterly earnings for the last time next month.


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