Proposed union of Uniti, Windstream leaves investors suspicious

Wall Street’s reaction to the proposed Uniti-Windstream remarriage is revealing. Investors seem to be telling the companies: We won’t be fooled again and we’re not convinced this year’s model is going to be substantially improved from the original version.

Two weeks ago, Uniti an- nounced the reunification with Windstream and said the two Little Rock companies together would create a high-achieving communications provider with the ability to add 1 million broadband customers beyond previous projections.

Uniti boasted it would be well positioned to succeed in the digital economy by stretching fiber in the home to new locations and by supporting future initiatives like self-driving cars and other applications that will require significant broadband network support.

The more services and applications that require broadband, the more money Uniti potentially could pocket.

Chief Financial Officer Paul Bullington told the investment community when the deal was announced May 3 that the combination “creates a true fiber powerhouse with unmatched fiber assets that are poised to deliver long-term returns and unlock significant value for shareholders.”

Investors have shrugged. Since the reunion was announced, Uniti’s stock price has tumbled 36% and is nearing a 52-week low.

Let’s revisit the selling points Uniti is touting: The company essentially becomes a communications provider — with consumer and wholesale operations — that owns and manages its fiber network. Capital and operating expenditures will be sliced; Windstream won’t be paying rent to access Uniti’s fiber so the deal avoids thorny negotiations down the road when the lease is up for renewal.

Kinetic, Windstream’s home and business broadband division, becomes a centerpiece of growth, particularly in smaller markets in the Southeast where it has a legacy consumer base and little competition. The division has delivered eight-consecutive quarters of customer additions and serves nearly 1.7 million broadband users today. It has taken over as the

top-revenue producer at Windstream since the pandemic, surpassing enterprise sales to larger businesses.

Kinetic ended the first quarter of 2024 with 401,000 customers having access to 1 gig broadband, skyrocketing from 18,000 at the end of 2023, according to federal filings in conjunction with the merger. Kinetic has the potential to reach 4.3 million families with fiber-to-the-home service and Uniti says that will expand to 5 million when the companies combine.

Windstream revenue was flat at $1 billion year-over-year, but Kinetic reported $547 million in sales — up from $536 million in the first quarter of 2023.

Quarterly financial details were included in a 20-page regulatory filing Uniti made related to the deal. By comparison, Windstream released a two-page factsheet noting a few financial and operational achievements the day before the Uniti deal was announced. Windstream, as a privately held company, is not required to file or report earnings.

Uniti began as the fiber division of Windstream until a spinoff about a decade ago. At the time, the move was sold as a tax-free deal that would provide financial and competitive advantages to both companies, realize significant financial flexibility by substantially lowering debt and increasing free cash flow to accelerate broadband investments and enhance growth opportunities.

Today’s selling points on the remarriage — similar to Uniti’s messaging — are not allaying market suspicions. And Uniti’s performance has not been sterling. Since operating on its own, Uniti has given investors an 83% price drop and a negative 61% total return.

Windstream also has undergone a significant ownership change — one that likely will influence Uniti’s future — by transforming to a privately held entity since the Uniti spinoff.

Elliott Investment Management bought controlling ownership of Windstream in 2020 by purchasing distressed debt to bring the company out of a bankruptcy restructuring. Elliott also currently owns about 4% of Uniti. Under Elliott, Windstream replaced longterm Chief Executive Officer Tony Thomas with Paul Sunu, an experienced communications executive with connections to Elliott.

In the new structure, Uniti shareholders will own 62% of the company; Elliott will control 38%. The five-member board will be expanded to nine and Elliott will appoint two of the new directors and the companies will jointly name the other two.

Private-equity investors like Elliott typically do not hang around for the long haul. The goal is quick profits on a shortterm investment before selling off the holding and moving on to the next target.

S&P Global Market Intelligence reports private equity traditionally swoops in for three to five years before selling out. That bears out in Elliott’s ownership of Windstream, which it controlled for four years leading to the Uniti deal.

Alltel Corp., which began this whole process by spinning off Windstream in 2006, was purchased by private-equity holders in 2007 and a year later that group sold the company to Verizon.

Privacy around Windstream’s financials also are worrisome to the investment community. “We don’t have the finer details on Windstream’s financials, but they are not going for this because their business is booming, and they want to share the largesse with (Uniti) shareholders,” Seeking Alpha, an open-form website for investors, reported when the deal was disclosed.

Windstream’s hush-hush financial approach was the topic of the first question Uniti executive management was asked on the call with the investment community when the deal was announced. Investors, an industry analyst noted, are being asked to inject capital into an enterprise without full financial disclosures from all parties.

Windstream CEO Kenny Gunderman assured investors more transparency around Windstream’s performance would be forthcoming.

This week, Uniti goes on the road to sell the deal to the investment community. Gunderman and Bullington will present the deal and tout its advantages at a Goldman Sachs conference Tuesday.

In a communication to employees, Uniti touted the acquisition as a step to build a premier digital infrastructure company. “Together, we will create a national fiber company that will help bridge the digital divide by providing high-speed connectivity to consumers, wireless partners and businesses,” the company said.

The deal requires state and federal regulatory approvals and is projected to close about a year from now.