Windstream snaps up 5G spectrum amid Chapter 11 proceedings, foreshadows post-bankruptcy business plan

As Windstream Holdings Inc. works its way through a possible year-long reorganization, the Little Rock-based rural broadband operator has offered a possible view of its strategic path back to profitability following a recent auction where it snapped up several large swaths of highly-prized, next-generation 5G spectrum.

On June 18, Windstream said it will pay a total of $26.6 million for 24- and 28-gigahertz (GHz) blocks of spectrum in 14 states covering more than 5 million total households, including nearly 2 million locations where Windstream is the incumbent local exchange carrier. The spectrum and associated electronics and equipment will be wholly owned by Windstream, company officials said.

“Windstream will use this new 5G spectrum to expand the availability of high-speed broadband, enabling consumers and small and medium-sized businesses in rural areas to access broadband speeds up to 1 Gigabit per second,” said Jeff Small, president of Windstream’s Kinetic business segment.

Windstream is among dozens of small, regional and national telecom firms and broadband companies that have been anxiously awaiting the FCC’s roll-out of additional spectrum for so-called 5G, the term for the next generation of cellular communications beyond the 4G LTE mobile networks of today. Some U.S. carriers such as Verizon and AT&T started rolling out 5G pilots in select markets in 2018, but 5G networks are not expected to be widely available until the 2020 timeframe, industry analysts say.

Under President Donald Trump, the FCC has made auctioning high-band spectrum a national priority. The FCC concluded its first 5G spectrum auction in late January in the 28 GHz band and completed bidding on 24 GHz spectrum on May 28. Together, those auctions raised more than $2.7 billion in gross bids for the federal government, including winning bids from 55 qualified applications that won 5,869 licenses.

But the biggest prize in the 5G race to market will come later this year when the five-person FCC board decides to release the upper-end 37 GHz, 39 GHz, and 47 GHz bands. With these auctions, the FCC will release almost 5 gigahertz of spectrum into the market — more than all of the other flexible use bands combined.

5G RACE TO MARKET
IHS Markit analyst Wayne Lam predicts that the global 5G transition is poised to take place at a faster pace than any previous wireless generation transition. Besides billions of investments from wireless carriers like AT&T, Verizon and Sprint on 5G infrastructure and networks, telecom backbone companies like Motorola, Ericsson and China’s Huawei have also started to release 5G smartphones and other products that offer clearer calls and allow for photos and videos to download in just seconds.

“It is easy to paint the current momentum behind 5G as the usual pre-launch hype drummed up by vested stakeholders,” said Lam, principal analyst for IHS Markit. “However, the mobile industry is fundamentally better prepared and more aligned with a common standard than at any previous technology transition.”

Parallel to global investment in the 5G transition, Lam said governments such as China and the U.S. are increasingly viewing 5G technology as critical to their respective global technological and economic prospects and are looking to claim 5G leadership. As part of the rush to market in the U.S., Ericsson announced Wednesday (June 26) that it will build a new factory in the U.S. that will open in early 2020 and produce 5G radios.

For landline companies like Windstream that have struggled to deploy high-speed internet options to rural customers comparable to those in urban markets, 5G will allow customers of the Arkansas broadband bundler to stream music, 4K video and virtual reality applications and games without buffering. For businesses, the service enables next-generation network, cloud, voice, security and business continuity solutions.

“Windstream is committed to bringing best-in-class Internet to rural communities, many in thinly populated areas, across our Kinetic footprint,” said Small. “We’re using a variety of methods to accomplish that goal, including software enhancements, fiber expansion, fixed wireless and now 5G wireless technology in our passionate pursuit to satisfy our customers’ growing demand for faster broadband speeds.”

Notwithstanding that admirable goal, Windstream’s success is largely dependent on how it emerges from a Chapter 11 proceeding before the federal bankruptcy court in New York City later this year or early 2020. The former Fortune 500 telecom’s default was precipitated by a Feb. 15 court ruling by U.S. District Judge Jesse Furman for the Southern District of New York that Windstream violated bond agreements after splitting off Uniti in April 2015 as Arkansas’ first publicly held real estate investment trust, or REIT.

Furman’s ruling arose from challenges by Aurelius Capital Management and U.S. Bank National Association. Since then, U.S. District Judge Robert Drain has approved the company’s request for $18.9 million in bonuses to retain company CEO Tony Thomas, Small and three other “key” executives to steer the company through its Chapter 11 reorganization in 2019.

However, following its delayed first quarter earnings report, Windstream posted a net loss of $2.3 billion, or a whopping $54.26 per share, compared to a net loss of $121 million, $3.25 per share, a year ago. Revenues for the three-month period ended March 31 fell 9% to $1.32 billion, compared to $1.45 billion a year ago.

Those results included a $2.3 billion non-cash goodwill impairment charge in the first quarter primarily due to a new lease accounting standard and the filing of the Chapter 11 bankruptcy. In a conference call explaining those disappointing results, Thomas set the table for a possible fight with Uniti over the value of a master lease agreement. Windstream is Uniti’s largest customer and is obligated for more than 60% of the company’s revenues due to a landlord-tenant, lease-back agreement going back nearly four years.

BANKRUPTCY EXTENSION, UNITI TALKS
During the conference call with Wall Street analysts and investors, Thomas also said the fair value of the assets the company is renting from Uniti is $7.5 billion, which he called “significantly above market.” Thomas said Windstream has utilized fiber to replace copper in select portions of its rural broadband markets, noting that many of those investments have boosted Uniti’s earnings and revenue under the terms of the master lease.

However, he said the remaining tenant capital improvements are expected to have little or no value at renewal of the lease in 2030. Given those factors, Thomas said Windstream estimates that the lease payment could be reduced by 80% or more if the lease were to be renewed in 2030, because of the significant decline in the value of landline assets. Noting Windstream’s possible plan, he said the diversity of such new technologies, such as 5G fixed wireless, is integral in evaluating the current lease.

“Discussions continue with the various parties involved in the restructuring process; however, it is too early to provide an expected timeframe for emergence,” Thomas said.

In the company’s last court hearing in New York bankruptcy court on June 17, Judge Drain granted Windstream a six-month extension to file its plan of reorganization. Also, the deadline to accept or reject real estate leases was moved to Sept. 23.

“We have made substantial progress in the roughly four months since voluntarily filing for reorganization and continue to work expeditiously toward a successful restructuring,” said Windstream spokesman David Avery.

In a story posted earlier this week, Wall Street’s Debtwire reported that Windstream and Uniti have begun formal lease renegotiations. In addition to a straightforward cut to the lease, the bankrupt Windstream is also examining other mutually beneficial arrangements with Uniti, said the financial news service.

“Negotiations were jumpstarted on the heels of the debtor submitting a business plan to the (Uniform Commerce Code) UCC,” Debtwire reported. “The plan does not envision a lease cut — as expected—given that negotiations around the issue have yet to play out.”

Paunie Samreth, associate editor at Debtwire’s West Coast office in Los Angeles, told Talk Business & Politics in a phone interview that although talks are in the early stage she believes the closely-tied Little Rock companies will eventually reach an agreement so they each can continue with their respective post-bankruptcy business plans.

“They are definitely far apart is my understanding but that would make sense in any sort of early stage negotiations,” said Samreth. “But at some point, you would think that they both need to come up with a plan so that Uniti can operate and continue its business plan because Uniti needs to make acquisitions and their stock price needs to support that.”

For Windstream, Samreth said the Arkansas broadband operator needs to figure out a bankruptcy exit plan over the next six months that allows it to be profitable and competitive. She said the Little Rock telecom can’t move forward without resolving the master lease agreement set to expire in 2030. The agreement provides for current annual rent of $659 million to Uniti paid in equal monthly installments in advance, with an annual base rent escalator of 0.5%, according to securities filings.

When asked about Windstream’s winning bids in the recent FCC 5G auction and the possibility of competing with larger telecom and wireless giants for pricier 5G spectrum in the future, Samreth said that business strategy also could led to peril.

“Where are they going to get the capital?” she asked.