Windstream, EarthLink announce $1.1 billion merger (Updated)

Little Rock-based Windstream Holdings, which has seen its market value drop more than 64% since early 2012, announced early Monday a merger-of-equals with the popular 1990’s Atlanta-based Internet dial-up provider Earthlink for $1.1 billion.

EarthLink shareholders will receive 0.818 shares of Windstream common stock for each EarthLink share owned. This ratio represents a 13% premium to the average exchange ratio of 0.721x over the month ended Nov. 3, 2016, the most recent unaffected trading day. The deal includes debt held by EarthLink.

Windstream expects to issue approximately 93 million shares of stock valued at approximately $673 million, based on the company’s closing stock price on Friday (Nov. 4). When the deal closes Windstream shareholders will own a 51% stake in the new company, while EarthLink shareholders will hold the remaining 49%.

“The combination with EarthLink further advances Windstream’s strategy by creating a stronger, more competitive business to serve our customers while increasing free cash flow and reducing leverage,” said Windstream President and CEO Tony Thomas. “With this transaction, we are combining two highly complementary organizations with closely aligned operating strategies and business unit structures. We look forward to working with the talented EarthLink team to create significant benefits and drive value for all of our stakeholders.”

According to company officials, the merged company will have increased scale and scope giving it the ability to leverage best practices across a broader platform, and offer residential and business customers expanded products and services. The combination will result in a national footprint spanning approximately 145,000 fiber route miles and provide advanced network connectivity, managed services, voice, internet and other value-added services.

The companies have identified more than $125 million in annual operating and capital expense synergies that are expected to be fully realized within 36 months of closing. Approximately $50 million of the synergies are expected to be achieved within 12 months of closing and an incremental $50 million are expected to be achieved within 24 months. The remaining $25 million are expected to be realized within 36 months. The $125 million of synergies has a net present value of $900 million, officials said.

The deal comes less one week after much larger rival CenturyLink announced a blockbuster deal to acquired Denver, Colo.-based Level 3 in an all cash-and-stock deal worth $34 billion, including debt.

ALLTEL CONNECTIONS
Over the last decade, Windstream and CenturyLink have waged a heated battle to see which company would come out on top as the largest rural landline and internet provider. And both companies’ emergence as rural telecom giants have ties to former Little Rock wireless giant, Alltel Corp., well before it was sold to Verizon Wireless for $28.1 billion in January 2009.

In the summer of 2001, Alltel first made a $6.1 billion hostile takeover bid for Monroe, La.-based CenturyTel for $6.1 billion, which was summarily rejected by the smaller telecom. At the time, Alltel President Scott Ford said the deal between the two companies would create the largest telecom in the U.S.

After months of back-and-forth and legal wrangling, CenturyTel was able to twice reject Alltel’s unsolicited bid to combine the two companies, which at the time would have created a rural telecom with 7.2 million wireless customers, 4.4 million telephone lines and more than $10 billion in revenue.

Eventually, Alltel agreed to only buy CenturyTel’s wireless assets for $1.65 billion, which grew Alltel’s total wireless customers to 7.4 million in 24 states. As part of that deal, Alltel agreed to withdraw its unsolicited bid to takeover CenturyTel and signed a one-year standstill agreement, while the Louisiana telecom agreed to dismiss a lawsuit against Alltel for interfering in its business operations.

Four years later, Alltel made the decision to be a pure play wireless company to compete with the likes of Verizon, AT&T, Sprint and T-Mobile. In July 2006, Windstream Corp. was formed as a public company following the spinoff of Little Rock telecom’s landline business and merger with Valor Communications Group, creating the nation’s leading rural telecom with annual revenues of $3.4 billion and customers in 16 states.

Fast-forward to 2013, after being named to the Fortune 500 list of largest U.S. companies when company sales grew to $6.2 billion, Windstream had completed eight acquisitions, expanded its operations to 48 states, and made nearly $4 billion in capital investments. But by the time, rival CenturyTel had surpassed Windstream as the nation’s largest rural telecom following the completion of its buyout of Qwest Communications for $12.2 billion on April Fool’s Day in 2011. Qwest, which was formerly U.S. West, was one of the 22 original Bell operating companies.

After buying Qwest, CenturyTel changed its name to CenturyLink and became the nation’s third-largest telecom, behind only larger Baby Bells AT&T and Verizon.

WINDSTREAM TRAILING CENTURYLINK
Windstream will have a way to go before it is back on a competitive footing with CenturyLink. The company’s market cap is only $696 million, well off its high of $1.97 billion in early 2012. The Little Rock telecom’s long term debt, mostly from past acquisitions, now stands at $4.6 billion.

In April 2015, Windstream completed the spinoff of Communications Sales & Leasing Inc. (CS&L) to create the state’s first publicly traded real estate investment trust (REIT). As the close of business Friday (Nov. 4), CS&L had a market cap of $4.14 billion.

If CenturyLink’s deal with Level 3 is approved by regulators, the combined company will have approximately $19 billion in pro forma business revenue for the trailing twelve months ended June 30, 2016. When the deal was announced on Nov. 1, CenturyLink and Level 3 had a combined market cap exceeding $32 billion.

At the close of business Friday (Nov. 1), Windstream shares (NASDAQ: WIN) ended the week at $7.24, up 46 cents or 6.78% as more than 5 million shares traded hands, three times normal daily volume. The Little Rock telecom has traded in the range of $4.75 and $10.46 over the past year.

After the transaction closes, Tony Thomas will serve as president and CEO and Bob Gunderman will serve as CFO of the combined company. Key EarthLink management members are expected to join the combined company to help with the integration.

Upon close, three of EarthLink’s existing directors will join the Windstream board of directors, bringing the total number of directors of the combined company’s board to 12. The new company, which will retain the Windstream name and will be based in Little Rock.

The transaction is expected to close in the first half of 2017. It is subject to numerous conditions, including approval by the Federal Communications Commission, a waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, state regulatory rules, and approval by Windstream and EarthLink shareholders.