Windstream's REIT Spin-Out & Reverse Stock-Split - Now What?

After the market closed on Friday April 24, legacy rural telecom provider Windstream Holdings Inc. WIN announced that it had completed the tax-free spinoff of "select telecommunications network assets," into Communications Sales and Leasing Inc. (CS&L). This new CS&L REIT will begin trading on Monday under ticker symbol CSAL. The transaction is also the catalyst for changes in the Windstream dividend; and a one-for-six (1:6) reverse stock split which could be confusing for investors and traders to understand. Under the terms of the spinoff and reverse stock split: 1. Windstream shareholders will receive one share of CS&L for every five shares of WIN; 2. Afterword, Windstream will effect a one-for-six reverse stock split of Windstream common stock effective at 8:00 pm on April 26, 2015. Tale Of The Tape - Final Day Before REIT Spin It will be important for investors to have this information in order to make the adjustments necessary to compare WIN trading activity before and after the REIT spin. During the past 52-weeks, shares of Windstream have traded in a range of $7.18 to $12.23, and closed down 5.5 percent on Friday, at $7.83 per share. Post-spin Windstream will be paying a regular dividend of $0.60 per share. S&P 500 Changes The spike down on Friday may reflect some final rebalancing of portfolios of ETFs and mutual funds that are indexed to the S&P 500. WIN shares will no longer be a part of that index, ironically being replaced by triple-net REIT stalwart Realty Income O. • http://www.benzinga.com/news/15/03/5367834/windstream-will-no-longer-pay-the-s-p-500s-highest-yield-what-investors-need-to-k According to an April 21, release by S&P Dow Jones newswires, both CS&L and Windstream will join the S&P MidCap 400 index after the close of trading on Friday. A Closer Look At CS&L REIT Spin The Windstream announcement characterizes CS&L as an independent publicly traded company, which although legally accurate, also doesn't convey the full story.  Windstream board member, Francis X. "Skip" Frantz, is leaving Windstream's board and will serve as chairman of CS&L's board.  Windstream initially will retain a 19.9% stake in CS&L "that will be used within the next 12 months to retire additional debt."  According to Moody's, with a single tenant, "CS&L is fully dependent upon and inextricably linked to the credit strength of Windstream." CS&L Helps Pay Windstream Debt  CS&L will fund a dividend to Windstream "as partial consideration for the contribution of select telecommunications network assets, including fiber and copper networks and other real estate, of Windstream Holdings, Inc."  CS&L has priced $400 million of senior secured notes at 6 percent and $1.1 billion in unsecured notes at 8.25 percent; as well as a $2.14 billion term loan facility, and $500 million in a senior secured revolving credit line, at floating rates.  Moody's rated CS&L debt B1 on March 31, or four notches below investment grade. While Moody's noted that CS&L would have "stable predictable revenues and high margins," the rating agency also pointed out "the 100% revenue concentration with Windstream (Ba3 stable) as its only tenant and its weak retained free cash flow as a result of its high dividend payout." CS&L Questions Windstream had previously announced that CS&L would be paying out a regular annual dividend of $2.40; but investors will have to wait until the dust settles after the initial trading day on April 27, to discern the yield for this new REIT. However, there could be a silver lining buried with the copper wires and fiber that CS&L is leasing back to Windstream, since as part of the deal CS&L will be able to lease excess capacity to other carriers. It remains to be seen if this will allow CS&L to grow revenue organically utilizing the legacy Windstream assets. This would be a variation on a successful business model used by wireless tower REITs. Since CS&L has a relatively high cost of capital -- which will make accretive acquisitions more challenging -- this becomes an important point for CS&L's management team to clarify.