Windstream CFO Bob Gunderman tells TelecomFinance how its newly spun-off REIT CS&L, to be headed by his brother Kenny Gunderman, has enabled it to unlock incremental cashflow, pay down debt and invest in itself. Claire Landon: Congratulations on the…
Windstream CFO Bob Gunderman tells TelecomFinance how its newly spun-off REIT CS&L, to be headed by his brother Kenny Gunderman, has enabled it to unlock incremental cashflow, pay down debt and invest in itself.
Claire Landon: Congratulations on the successful spin-off of CS&L, Windstream’s network business, which is now trading as a REIT. How did the decision to create a REIT come about?
Bob Gunderman: We started thinking about how tower spin-offs create value and bring investment back into the business. We realised that copper and fibre are in fact real estate assets, just like data centres and towercos.
CL: Was it difficult to get the REIT approved?
BG: Once we started on the path to create it, we had to get IRS approval and it also required FCC review and PUC approval in several states. We approached them with our argument and convinced them. What we carried out was a pro-forma transaction, which did not require FCC approval. It was a fairly straightforward process, we did our homework to prepare and did not meet much resistance.
CL: What are the benefits of creating two separate companies?
BG: CS&L has the ability to pay a substantial dividend and it carries a larger burden of debt. Windstream, the operating company, has for its part been able to unlock incremental cash flow and pay down half of its debt. We’ve been able to repurpose the money as investment back into the company. CS&L has the ability to work with telcos, cablecos and fibrecos, while Windstream can invest back into itself.
CL: Independent towercos and data centres have used the REIT model, but Windstream is the first carrier to employ it. Do you expect this to catch on elsewhere in the communications sector?
BG: We know that competitors are interested and some have gone on the record saying that they are reviewing the opportunity. We believe there is a significant value proposition for a REIT, at least in Windstream’s case. We believe a standalone REIT has the ability to acquire other assets.
CL: Will CS&L, like independent towercos, deploy its sale-and-leaseback model with operators other than Windstream? How will the relationship between the two companies work?
BG: Windstream has 35-year, exclusive use of the assets it contributed to CS&L. However, CS&L is free to carry out its own REITs with other companies – but it has no ability to share our [Windstream’s] infrastructure with others. We didn’t want to lower the barrier for entry to our existing markets. If there were another company wanting to participate in our market as a reseller of Windstream, it could. That kind of agreement did exist before, and still does now. Any such agreement would be with Windstream itself as CSL does not have the ability to enter into those types of reseller relationships with our contributed assets.
CL: Which, if any, infrastructure remains in the original company? Why was it not REIT-able?
BG: We only transferred 25% of our total assets, the majority of which were copper and fibre distribution lines. We didn’t contribute every single REIT-able asset, since transfers come with debt. It had to be a beneficial transaction for each company.
CL: Is Windstream now effectively a servco or a virtual operator? What is the attraction of this to investors?
BG: Windstream is still the same telecom provider serving all the same customers. The difference is that we are now able to serve them better and are able to invest back into our own business. Plus, we have operational control of the contributed REIT assets for up to 35 years.
CL: What is the attraction of each company to investors?
BG: Windstream has shifted from being a high yielding dividend stock to one providing opportunities for equity growth and increased cash flow.
CL: Could this kind of separation apply nationally as well as regionally?
BG: It is probably best for more regionally-focused telcos, since it allows them to compete better. That being said, telecoms is one of the largest asset classes. Windstream has now laid the groundwork for this kind of deal.
