Stephens Inc.’s Chad Crank, head of the Telecom investment banking practice for the Little Rock-based investment giant, offered his thoughts recently on the implications of Windstream’s evolving business and its recent spin-off of a Real Estate Investment Trust (REIT) for its assets.
Crank’s comments appeared on the Stephens web site in the form of a Q&A:
Q: What are the important trends in telecom?
Crank: My thesis for the industry is around two fat pipes – the first is fiber that directly connects homes and businesses to the internet and the second is wireless networks which continue to become even more ubiquitous. We are in the second inning of the game in terms of getting fiber to homes and business fiber connections are not too far ahead of that. Once those connections are more pervasive, it will open new ways for people to fill the pipe. Video is probably most notable but how it is delivered will evolve. There will also be more virtualization and gaming.
With this increased use comes more data. Where will all that data be stored? How will it get managed? How will it be protected? That’s another aspect of the opportunity that’s growing at a rate of over 20% a year. Wireless will continue to grow as bandwidth usage steadily increases and the number of devices that are connected expands exponentially. Eventually, almost any consumer device you buy – your camera, your refrigerator, your car – will be connected to that same wireless backbone.
All that wireless usage drives the demand for spectrum. The government has auctioned off very narrow slivers of spectrum recently for tens of billions of dollars, which shows how valuable it is. More spectrum will have to be sold and the secondary market will continue to evolve. Stephens has been involved as an advisor on several notable spectrum transactions and we expect that to continue.
Q: Stephens advised on the spin-off of some of Windstream’s assets into a REIT, which was a first of its kind. What are the implications for telecom because of this deal?
Crank: Windstream was the first company to get a ruling from the IRS that traditional telecom assets – copper wires, fiber, conduit, and related assets – are real estate and are classified as such for tax purposes. The resulting tax savings means it will lead to a significant increase in shareholder value over time and opens up access to more yield-oriented, long-term investors, which then translates into a higher value for those assets.
This thesis around maximizing the value of telecom assets is something we will continue to be involved with. As telecom companies continue to build out these assets, especially fiber, this new approach has the potential to broadly transform the industry.
Q: Will there be more deals like the Windstream REIT?
Crank: Yes, in a couple of forms. First, Communications Sales & Leasing, Inc., the publicly traded REIT spun off from Windstream, should be a new source of capital for companies who own similar assets but are not large enough to do their own REIT or just in a different situation than Windstream. CSL can buy assets that fit their parameters and lease those at a rate that looks attractive to both sides.
Second, other companies can use the template that has been laid out by Windstream to form their own REIT. That may take a little bit more time, because Windstream had a unique set of circumstances that made the REIT a very elegant solution for them and it took several years of hard work. It is something we will continue to explore.
You can access Crank’s full Q&A at this link.