Windstream Holdings completes Earthlink merger, sees further leverage improvement after synergies

By Paul Deckelman

New York, March 1 – Windstream Holdings, Inc. said Wednesday that it had completed its pending merger with Earthlink Holdings Corp. – and said that the combination of the two telecommunications companies would allow the combined entity to further improve its balance sheet and leverage measures.

Little Rock, Ark.-based Windstream’s president and chief executive officer, Tony Thomas, told analysts on the company’s conference call following the release of its financial results for the 2016 fiscal fourth quarter and full-year period ended Dec. 31 that its $1.1 billion all-stock merger with Atlanta-based Earthlink would provide, among other benefits, “an enhanced balance sheet that will provide financial flexibility for the long-term; and finally, significant adjusted free cash flow accretion, which will be used to reduce debt, support our continued network investment and provide greater coverage of the dividend.”

Windstream chief financial officer Bob Gunderman told the analysts that following a series of recent transactions, “we have an attractive debt maturity profile with no near-term maturities and have continued to improve on this in early 2017.”

He noted that earlier in the year, after the close of the fourth quarter, Windstream had refinanced an existing term loan to extend the maturity of that $580 million obligation out to 2024 from 2019.

It also closed on the remaining portion of a $600 million add-on to its existing $745 million of term loan debt due 2021 to refinance EarthLink’s approximately $430 million of outstanding debt.

Pro forma for the completion of the merger, the two companies’ debt as of Dec. 31 stood at $5.293 billion, and their capital lease obligations totaled $66.8 million.

Less a pro forma total of $110.6 million of cash and equivalents, net debt stood at $5.249 billion.

With pro forma adjusted OIBDA – an income measure used in the telecom industry – of $1.473 billion, the combined company’s leverage ratio of net debt as a multiple of OIBDA stood at 3.56 times – down from the 3.86 times for Windstream on a stand-alone basis.

Gunderman noted that “we have already reduced leverage by 0.3 times and will reduce leverage by a total of 0.5 times after synergies and will continue to opportunistically look for ways to optimize the balance sheet.”

Beyond the pro forma gains produced from the merger, Windstream was active on the debt-reduction front in 2016, when, as Thomas said, “debt reduction remained a focus.”

He noted that the company had completed the last step in its 2015 spinoff of some of its assets into a new communications-oriented real estate investment trust now known as Uniti Group Inc. by executing a debt-for-equity exchange for $672 million that closed in June.

“Combined with 2015 and 2016 open-market debt repurchases, we have reduced debt by $748 million. Additionally, we refinanced debt and improved our maturity profile and lowered our cash interest expense,” Thomas said.

During the question-and-answer portion of the conference call following the formal presentation by the two executives, an analyst noted that the company expected to generate $200 million of free cash flow in 2017, or about $80 million after payment of dividends, and wanted to know if it would continue to cut debt using that money.

Gunderman replied that “in terms of free cash flow, yes, we’re going to generate approximately $200 million of free cash flow for the year. Keep in mind, on a pro forma basis, the full year dividend impact is around $115 million or $116 million, and so the excess that we would have after satisfying the dividend, obviously, we’re looking to pay down debt and to continue to make progress on the balance sheet there.

“And so, that’s our current views on free cash flow use.”

© 2015 Prospect News.
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