Windstream in Good Position to Buy Other Carriers, Analysts Say

By Friedman, Mark

SEVERAL ANALYSTS SAY Windstream Corp. of Little Rock is now in a good position to buy other rural local exchange carriers.

Windstream had been limited to the amount of stock it could issue as the result of its spin-off from Alltel Corp. of Little Rock in 2006. That restriction expired Friday on the two-year anniversary of the split.

“Once the restrictions are lifted, there aren’t any restrictions,” said David Avery, a spokesman for Windstream.

Issuing stock, though, is only one of the ways to finance the purchase of a carrier, he said.

Still, with the restrictions gone, Windstream would be in a position to raise money to buy companies, said Michael Nelson, a telecommunications analyst at the Stanford Group Co.

“I would expect them to begin to consolidate the industry, which is extremely fragmented,” Nelson said. “Management has been quite vocal about the need and desire to consolidate the industry.”

Avery wouldn’t say if Windstream was going to target any companies.”We don’t comment on any rumors or speculation regarding [mergers and acquisitions," he said.

Rural local exchange carriers have been underperforming the market, which makes several of them a likely target for purchase, Chris Larsen, a telecom analyst with Credit Suisse, said in a memo on May 27.

"There has been considerable pressure on the RLECs . . . driven by greater cable competition and wire-less substitution, which has resulted in accelerated access line losses," Larsen wrote. "Increased access line losses could ultimately call into question the sustainability of RLEC revenues and free cash flow."

Larsen said the candidates to be bought are Citizens Communications of Stamford, Conn.; Iowa Telecom of Newton, Iowa; and Consolidated Communications of Mattoon, Ill.

Nelson also said Windstream's most likely target would be Citizens.

Citizens operates in 24 states and has 3 million access lines and high-speed Internet subscribers. Windstream has 3.2 million customers in rural areas in 16 states.

Citizens' spokesman David Whitehouse declined to comment on the possibility of its being bought.

Citizens isn't acting like it's going to be merged, though. It announced in May that the company's name will change to Frontier Communications Corp. on July 31.

Whitehouse said the name change was for branding purposes and most of its customers already know it as Frontier Communications anyway.

Citizens has seen slow growth in the first quarter of this year. While Citizens' revenue increased 2 percent to $569.2 million in the first quarter of 2008 over the same period last year, its net income dropped 32.6 percent to $45.6 million.

On May 27, Larsen upgraded Citizens' rating from neutral to outperform because it might be a possible takeover target for Windstream or Embarq Corp. of Overland Park, Kan. Embarq spun off from Sprint Nextel Corp. in 2006, and it recently had the restrictions lifted on the amount of stock it could issue.

Consolidated said last week that its strategy is to pursue selective acquisitions.

Condolidated "is not looking to be acquired," said Laura Zuhone, a spokeswoman for Consolidated. "But we will always take into consideration the best interest of our shareholders."

Iowa Telecom didn't return calls for comment.

Windstream CEO Jeff Gardner has said the RLEC industry needs to be consolidated.

"Without talking about some specifics we still think [mergers and acquisitions] makes great sense in this business; tremendous synergies can be generated,” he said during the first-quarter conference call in May. “You can continue to build stronger companies, improve positioning from a scale and scope perspective. We’re hopeful there will be opportunities for us to really leverage those things in the near to medium term.”

Stanford’s Nelson said he sees a day when Windstream will be the largest rural local exchange carrier in the country. Currently, Windstream is No. 2, behind Embarq.

Copyright Arkansas Business Jul 21, 2008

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