UNIT Has At Least Two Good Deal Opportunities in 2017

  • Management has hinted at a larger strategic transaction which would lower UNIT’s reliance on Windstream revenue, currently 70% of total revenue.
  • Windstream (WIN) has been aggressively acquisitive recently, and will have to conduct another sale-leaseback with UNIT for ELNK assets within the next year.
  • Frontier Communications (FTR) recently cut the dividend, but will continue to struggle to pay down debt. A sale-leaseback deal could buy management more time to stabilize the business.
  • Other sale-leaseback opportunities could include asset sale-leasebacks from CNSL and TDS, or a merger of equals with ZAYO.

I have a large position in Uniti Group and my ears perked up when I heard this on the earnings call this week.

We’re very encouraged by the quality of the discussions and the assets we are targeting, including specifically fiber and fiber-enabled consumer broadband. We feel very bullish about future M&A prospects. And although not included in our guidance, we’re increasingly that there will be accretive M&A and sale leaseback activity during the balance of the year.

With these opportunities in mind, we pre-funded the Hunt and Southern Light acquisitions with our most expensive sources of capital, which creating maximum financial flexibility for M&A during the balance of the year, including potentially larger, more strategic transactions.

I see at least 3 big sale-leaseback opportunities out there for UNIT in 2017.

Windstream will Eventually Monetize Earthlink Assets

WIN is going to have to sale-leaseback its new ELNK assets. Windstream also reported earnings this week, and along with RLEC peers, posted results which disappointed investors. Thanksgiving is probably going to be awkward around the Gunderman household, but as a shareholder I expect UNIT to drive a harder bargain for these assets because they run counter to UNIT’s plan to diversify its revenue streams. So this seems less likely, especially given management commentary.

Yeah. I’m sorry, David. Yes. On EarthLink, look, the way you phrased the question is appropriate in terms of – we have stated very clearly repeatedly that our mission is to diversify. We’re very, very focused on that. And so, anything that counteracts that diversification requires a high bar for us to cross in order to transact. And so, you start with that. And that hasn’t changed.

Secondly, I think we’ve said that if there’s a discussion to be had with Windstream on EarthLink, we’re happy to have it, but we’re coming at it from a position of the transaction needing to be a positive transaction for us not only financially, but also on market lease terms and also a transaction that has a strategic element to it in addition to just having the financial benefits of being immediately AFFO accretive, like you mentioned.

And, look, as we’ve also pointed out, across the board, in our sale leaseback transactions, there are many creative interesting ways for us to add strategic elements to those transactions that bring benefit not only to our leasing business, but also to Uniti Fiber, the operating business. There are some raw materials there for an opportunity for us that could be attractive, but at the same time, the bar is high.

To be able to refinance debt on more favorable terms, UNIT needs to diversify its revenue away from Windstream. So I think it’s more likely that FTR, CNSL, or TDS do a deal sometime soon.

Frontier Should Be Most Interested

FTR bought an expensive set of wireline assets from Verizon in California, Texas, and Florida (CTF) last year, and it is becoming increasingly apparent that they took on too much debt to do so. Having cut the dividend by only 60%, Frontier hasn’t bought itself a lot of runway to pay down debt. They will have to do more, and management has stated that they will issue more secured debt in 2Q17. This is not the optimal solution to FTR’s problems. The company paid $388m in interest expense this quarter, on $850m of EBITDA. Because FTR management never really proved that the AT&T deal for Connecticut assets was accretive, I think any attempt to access the secure debt markets would be met with skepticism and uncomfortably high interest rates.

What has always bothered me about this management team is that they have historically been intellectually dishonest about their own financials, but I think the new CFO may be changing things. From UNIT’s perspective, a good sale-leaseback deal with FTR gets it below 50% revenue dependence on WIN in a single shot. If I were UNIT’s CEO I would be calling these guys non-stop. The real obstacle here is convincing the thickheads at FTR that a sale-leaseback is in their best interest. If UNIT can get a deal done for FTR’s $14b of fiber and copper assets, it could be a game changer for both companies.

Long-Shots Include CNSL and TDS

Sale-leasebacks have sometimes been referred to as pawn-shop transactions. In that light I think CNSL would be the most interested company to cash-out some assets. CNSL is levered up 4.6x due to a pending acquisition of Fairpoint Communications, and is in the types of markets that interest UNIT. Cash-on-hand could help CNSL either paydown debt to shore up the dividend or fund further acquisitions.

TDS is unlikely but still small(ish) and doable. TDS has an owner who doesn’t seem to see the writing on the wall for USM and consequently does not seem interested in selling anything.

I am not sure what other suitable strategic deals are out there for UNIT at this point, but judging from the tone of the most recent earnings call UNIT has something surprising within it’s cross-hairs.


Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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