Busy M&A Season May Be Biggest Barrier for Windstream/EarthLink
Windstream and EarthLink believe they will break through a growing mergers and acquisitions backlog and secure regulatory OKs for their $1.1 billion deal in the first half of 2017, Windstream executives said Monday. A free-market think tank also predicted a green light, while analysts said the deal combines complementary networks and will result in savings. CenturyLink said last week it's buying Level 3 (see 1610310033) and AT&T agreed the prior week to buy Time Warner (see 1610270046). Those deals are worth about $140 billion combined.
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“We’ll do our best to navigate the traffic jam at the FCC and the public service commissions with all these deals that have been announced over the last couple of weeks,” Windstream CEO Tony Thomas said during a Monday conference call. The deal requires regulatory approvals by the FCC and about 20 states, as well as a Hart-Scott-Rodino antitrust review and votes by each company’s shareholders, said Bob Gunderman, Windstream chief financial officer. Gunderman said there’s a “compelling argument” for regulators to say OK because it’s a CLEC pact with no “commanding market share generated as part of the transaction. … We certainly believe that there’s a lot of public interest for bringing these two companies together.” The combination will result in “a stronger, more competitive company,” Thomas said.
The acquiring telco's shareholders will control 51 percent and EarthLink's 49 percent of the combined company, which will take Windstream’s name, they said in a news release. Thomas will stay on as president and CEO, while Gunderman will remain CFO. Three EarthLink directors will join Windstream’s board for a 12-member board. The deal provides the companies greater scale to expand products and services, with a national network of 145,000 fiber route miles, including strategic routes in the Southeast and Northeast, they said. The companies estimated about $900 million in synergies, plus tax benefits, with $125 million in annual operating and capital expense savings expected to be fully realized within 36 months of closing.
The transaction shouldn’t “raise serious concerns for regulators,” much like CenturyLink/Level 3, Free State Foundation President Randolph May emailed. “These proposed deals are driven mostly by the need for scale in order to achieve cost efficiencies and to muster the substantial financial resources required to raise the capital needed to invest in new and upgraded broadband networks.”
The agreement marks “another step towards consolidation in the enterprise communications space in an effort to benefit from scale and synergies,” UBS analysts emailed investors Monday. Wells Fargo analysts said the networks are complementary, “as both have strong presence in the South East, South and parts of the Midwest.” EarthLink’s fiber assets might lead to a later agreement with Communications Sales & Leasing, a communications real estate investment trust, the Wells Fargo analysts said.
Windstream and EarthLink are “two companies on parallel paths,” EarthLink CEO Joe Eazor said in the news release. Thomas agreed the deal combines “two highly complementary organizations with closely aligned operating strategies and business unit structures.”
The companies also Monday reported Q3 results. Windstream reported total revenue of $1.34 billion in the quarter, a 10 percent drop from Q3 2015. Operating income dropped 28 percent to $129.4 million. Windstream reported a net loss of $66 million, compared with a $7 million loss one year ago. EarthLink sales fell 13 percent to $235 million. The company reported net income of $200,000, compared with a $10.5 million loss in Q3 2015. Net income this quarter included a $4.4 million loss on debt extinguishment and $3.4 million pretax gains on the sale of businesses, it said. EarthLink shares closed down 10 percent to $5.60 Monday Windstream was little changed at $7.23.