Windstream Holdings Inc. of Little Rock and EarthLink Holdings Corp. of Atlanta announced Monday an agreement to merge in an all-stock deal valued at about $1.1 billion, including debt.
The deal, set to close in the first half of 2017, will give Windstream shareholders 51 percent ownership of the combined company.
Under the terms of the agreement, EarthLink shareholders will receive 0.818 shares of Windstream common stock for each EarthLink share owned, a 13 percent advantage over the 0.721 average exchange rate for the month that ended Nov. 3.
Windstream said it expects to issue about 93 million shares of stock valued at about $673 million, based on the company's closing stock price on Friday.
More: View Windstream's merger presentation for investors.
A proxy statement and merger agreement will be released in the next three days, company representatives said during an earnings call Monday.
"The combined company will have increased scale and scope giving it the ability to leverage best practices across a broader platform, and offer customers expanded products, services and enhanced enterprise solutions," the firms said in a news release. "The combination will result in an extensive national footprint spanning approximately 145,000 fiber route miles and provide advanced network connectivity, managed services, voice, internet and other value-added services."
Windstream CEO Tony Thomas said the deal combines "two highly complementary organizations with closely aligned operating strategies and business unit structures."
The companies emphasized during the call that the merger would enhance cash flow, benefit leverage, increase the portfolio of products available to customers and position the new combined company to be more competitive, especially in the wholesale and enterprise businesses.
The combined company will take several paths in pursuing growth in its enterprise business and the larger scale will increase its competitiveness, executives said during the call.
"We anticipate achieving in excess of $125 million in annual synergies, which have a net present value of approximately $900 million including integration costs," Thomas said.
Of that $125 million, at least $50 million will come about within a year after the closing, another $50 million will come in year two and the last $25 million will be seen in year three, he said.
Windstream's ownership will amount to value creation of $4.70 cents per Windstream share and $3.85 cents per EarthLink share, according to Thomas.
Windstream CFO Bob Gunderman, in answering a question about the financial impact from Business Data Services reform that the FCC is considering later this month, referenced a $20 million annualized benefit to free cash flow. "This transaction is a significantly deleveraging transaction for us. It takes our leverage down 0.3 times initially and then about a half a turn after the realization of synergies,” he said.
Thomas said the cash flow would help Windstream reduce debt, continue investing in its network and increase dividend coverage.
Windstream will refinance EarthLink's $436 million in debt and a dividend of 60 cents per share will be paid following the closing of the merger, Thomas said.
He also said EarthLink is contributing strategically located fiber routes in the Southeast and Northeast that will save the company money and increase sales opportunities.
Louis Alterman, EarthLink's executive vice president and CFO, said during the call that 16,000 of the 29,000 fiber route miles the company is bringing into the deal are miles Windstream does not have.
"Today's announcement is the next logical step that builds on what we've accomplished over the last few years and accelerates our progress forward…," EarthLink President and CEO Joe Eazor said during the call. "Windstream and EarthLink are a natural fit."
Eazor said he was viewing mergers and acquisitions through the lenses of strategic fit, operational alignment and financial return, all of which this deal satisfies.
The companies said Thomas will be president and CEO of the combined company, and that "key EarthLink management members are expected to join" to "bring best-in-class talent and ensure a smooth integration."
They also said three EarthLink directors will join the Windstream board, bringing the total number of directors of the combined company's board to 12.
The combined company will retain the Windstream name and be headquartered in Little Rock.
The announcement comes the day Windstream reported third-quarter results. The company reported a net loss of $66 million, or 72 cents per share, compared to a loss of $7 million, or 8 cents per share, in the same quarter last year. Total revenue was $1.34 billion, down from $1.50 billion in the same quarter last year.