Windstream Adopts Poison Pill, Says Not An Anti-Takeover Plan

Windstream Holdings Inc.’s board of directors on Friday announced that the Little Rock telecom has adopted a poison pill plan in order to protect a tax benefit the company received after spinning off its telecom network assets into a publicly-traded real estate investment trust (REIT) in late April.

According to Windstream, the shareholder rights plan it adopted is designed to protect Windstream’s valuable net operating loss carryforwards (“NOLs”), which amounted to $1.2 billion at the end of the second quarter. Under the complex Section 382 rules of the Internal Revenue Code, NOLs can be used to offset taxable income and can be carried forward 20 years from the original loss, making it a valuable asset in the company’s portfolio of financial assets.

But on the negative side, those same rules can place significant restrictions on the value of the NOLs, especially in the event of an ownership change, according to the IRS. And not surprisingly, the board added that the “rights plans” was not meant to be an anti-takeover measure.

In its news release, Windstream said its ability to utilize these tax assets would be substantially limited if an “ownership change” occurs.

“In general, an ownership change will occur when the percentage of Windstream’s ownership by one or more 5% shareholders” has increased by more than 50% at any time during the prior three years,” the company said. “The purpose of the Rights Plan is to deter an ownership change from occurring under these technical rules, which will protect Windstream’s ability to utilize its valuable NOLs and avoid a reduction in shareholder value that would occur from the NOLs becoming subject to limitations under IRC Section 382.”

Under the plan, Windstream shareholders will receive one preferred share purchase right for each share of common stock outstanding. If a shareholder (or group) acquires beneficial ownership of 4.9% or more of the outstanding shares of Windstream’s common stock without prior approval of the Board of Directors or without meeting certain customary exceptions, the rights would become exercisable and entitle shareholders to purchase additional shares of Windstream at a significant discount and result in significant dilution in the economic interest and voting power of acquiring shareholder or group.

Existing shareholders who currently beneficially own 4.9% or more of the outstanding shares of common stock will cause this dilutive event to occur only if they acquire a certain amount of additional shares.

In its discretion, the board may exempt certain transactions from the provisions of the Rights Plan, including if it determines that the transaction will not jeopardize the deferred tax assets or the transaction will otherwise serve Windstream’s best interests.

According to the news release, the Windstream board of directors determined that the shareholder rights plan was warranted and in the best interest of all shareholders due to the substantial size of the NOLs, the importance of these potential benefits for future cash flows, and the risk of Windstream experiencing an “ownership change.”

The Little Rock telecom giant said it will submit the continuation of the plan to a shareholder vote at the 2016 Annual Meeting of Shareholders, and the failure to obtain shareholder approval will result in termination of the plan in 2016.

And although the company stressed the poison pill was not an anti-takeover defense, some analysts see Windstream as a possible buyout target as the company’s shares have lost nearly half of their value in fiscal 2015, pushing the Little Rock telecom giant’s market capitalization down to about only $700 million.

A week ago, Wall Street investment research firm Gabelli & Co. also painted a scenario of Windstream selling its stake in CS&L for about $683 million in early 2016.

“Windstream has been underperforming in its enterprise business for some time and needs to make meaningful investments in its network to improve top line,” Gabelli said in a research note on Sept. 11. “We do not expect revenue stabilization until 2018.”

At the end of this week’s trading, Windstream shares fell 5.56% to close on Friday at $6.80, down 40 cents. CS&L, which now has a market cap of $3.1 billion or four times that of Windstream, closed at $21.02 per share, down 42 cents at 1.97%.