Spin-Off Research In the News

How Windstream Could Win

Posted by Joe Cornell on Wed, May 20, 2015 @ 09:05 AM


Below is an excerpt from the 5/15/15 Barron's article S&P 500 Hits a New High of 2122.73:

By Vito J. Racanelli | May 15, 2015

Windstream Holdings (WIN) provides network communications, such as broadband Internet services, phone, and digital TV services, to businesses and residences. Based in Little Rock, Ark., it operates in 48 states, mostly in rural areas in the East and Midwest. On April 24, it spun off 80% of Communications Sales & Leasing (CSAL), a real-estate investment trust. Based on CSL’s $4.1 billion market capitalization, Windstream’s remaining 19.5% stake is almost equal to its entire market cap.

CSL owns, operates, and leases telecommunications assets, such as copper and fiber-optic lines, which were formerly owned by Windstream, its only customer.

As a tax-advantaged REIT, CSL is able to pass on most of its earnings to its shareholders in the form of dividends. It offers an attractive 8.7% yield on its $27.53 share price. The spinoff was done to capture the much higher valuations awarded to REITs than telecom operations.

Since the spinoff, Windstream shares have dropped from a high of $13 to $8.61, giving the company a market value of $868 million. Windstream’s remaining stake in CSL is worth about $800 million.

Stripping out the value of CSL would leave Windstream’s remaining operations with an implicit value of just $68 million, says William Mitchell, portfolio manager of the Spinoff & Reorg fund. Windstream could generate $5 billion in sales this year, and about $940 million in pro forma earnings before interest, taxes, depreciation, and amortization. That implies the Ebitda of the remaining operations are 14 times greater than the value of the operations themselves, says Mitchell, whose fund owns Windstream and is short CSL.

In a recent report using peer comparison valuations, Spin-Off Research, a specialist in sizing up such assets, put a $12 price target on Windstream.

How can this carrier seemingly be so mispriced? Mitchell says both parent and spinoff aren’t well-known names on Wall Street and operate in a small segment of an industry not particularly popular with investors. Moreover, before the spinoff, many Windstream shareholders were probably high-yield-seeking investors. Following the spinoff, they probably kept CSL, with its generous yield, but sold Windstream, which was yielding 1.1%, not including dividends from its remaining CSL stake.

Is the nation’s largest rural carrier, with annual revenue of more than $5 billion, really going to have a market value of just $68 million? Probably not, Mitchells says.

Windstream has its problems, and operates in a challenging industry. Revenue continues to decline. Operating margins are expected to contract from 37% last year to 34% or so this year, and possibly less in the future. Windstream has debt of $5.25 billion, some of which it intends to pay down through the sale of its remaining CSL stake, compared to $856 million in shareholders’ equity, pro forma. Mitchell notes that long-term debt doesn’t mature until 2019, “giving it plenty of breathing space” to put its business on a better footing.

Windstream is a short-term buy, not a long-term investment, and vigilance is required. Institutional investors might consider buying Windstream and shorting CSI to focus on the investment in Windstream alone, although individual investors might not be so intrepid on the short side.

To view the entire article on barrons.com click here: S&P 500 Hits a New High of 2122.73