A Remade Windstream Bets on Itself

A Remade Windstream Bets on Itself
CEO Tony Thomas says most of Windstream’s debt will be discharged when it rises from bankruptcy. (Karen E. Segrave)

Publicly traded Windstream Holdings Inc. of Little Rock, set to emerge from bankruptcy in a few weeks as a private company, plans to invest heavily in its future as a provider of business communications products and services and high-speed broadband for rural consumers.

It will also unburden itself of $4 billion in debt, a two-thirds reduction, and have six new majority owners, all out-of-state firms.

“We’re in the midst of a transformation. We’re getting ready to embark on a really large capital program,” CEO Anthony W. “Tony” Thomas told Arkansas Business. He will continue to lead the company, and his contract runs through 2024.

“And while that’s very exciting for our customers and employees, public markets don’t always favor large capital programs, and our enterprise revenues are shrinking because we’re losing some of those legacy revenues,” he said. “And that kind of complex revenue transformation is a complicated story to communicate to Wall Street. We believe getting further along in our transformation as a private company is the right path.”

Legacy revenue includes revenue generated by the landline telephone services Windstream was founded to provide.

Thomas said that as a private company, Windstream won’t be run from quarter to quarter and can focus on creating long-term value for its owners instead. He said it could be more aggressive in the short term, by making investments that pay off in two or three years instead of two or three quarters. For example, it plans to bring 1-gigabit-per-second internet to its 18-state footprint, and Arkansas is “high on our priority list,” he said.

Becoming a private company is also a time saver, he said. Public companies spend a lot of time meeting filing and other requirements.

Return to Profitability

Windstream, which was spun off from Alltel Corp. of Little Rock in 2006, has had only one profitable quarter in the past four years. It lost a combined $2.82 billion on $11.56 billion in revenue in 2017 and 2018.

The company filed for bankruptcy in February 2019 in response to a $310 million judgment won by bondholders in a dispute over the 2015 spinoff of Uniti Group Inc. into a separate publicly traded company, also based in Little Rock.

Windstream lost $3.09 billion on revenue of $5.12 billion in 2019, and its losses have continued in 2020 — $241 million in the first two quarters, which is a vast improvement over the $2.8 billion loss in the first six months of 2019.

Thomas, CEO since late 2014 and chief financial officer for five years before that, said the company’s debt, most of which is being discharged when it emerges from bankruptcy, held it back from profitability for years. Another obstacle was Windstream’s lack of progress in its planned transformation, he said.

Windstream “will return to profitability almost immediately upon emergence” from bankruptcy, and it will focus on two things going forward, Thomas said.

“One is going to be building fiber to the home to just under 2 million homes, if not more than that. And the second is to expand our enterprise cloud-based solutions,” he said. “It’s all about pushing Windstream to growth and doing it on the strength of our fiber investments and our cloud-based solutions.”

Bankruptcy Wrapup

Before the company can launch into the future Thomas describes, it has some housekeeping to do.

The bankruptcy Windstream has been working through since February 2019 was triggered by a federal court judge’s ruling that spinning off its fiber and copper assets into Uniti Group ran afoul of bond covenants.

The ruling that led to the filing came in a lawsuit brought by Aurelius Capital Management of New York, and Windstream couldn’t afford to pay the judgment. Then the company was delisted from the Nasdaq, moving immediately to trading its stock on the OTC Bulletin Board, or “pink sheets” market.

In late June, the U.S. Bankruptcy Court for the Southern District of New York approved Windstream’s reorganization plan.

The company is working now to secure final regulatory approvals and finish raising $2.15 billion in exit financing to support ongoing operations. “That’s all underway, and we expect to have that done in short order,” Thomas said.

Elliott Management Corp. of New York will own approximately 40% of the new Windstream. The other major shareholders, owning 40% altogether, are Franklin Resources Inc., Pacific Investment Management Co. LLC and Oaktree Capital Group, all of California; HBK Capital Management of Dallas; and Brigade Capital Management of New York. Thomas said the remaining 20% of the company would be distributed among other investors.

The company’s stock will be “extinguished” when it goes private, Thomas said. He said he didn’t know how much Windstream stock has been held by employees in their retirement accounts.

The company’s leadership team will remain in place and has received millions in bonuses since the bankruptcy filing. In May 2019, the courts approved Windstream’s request to use up to $24 million for bonuses. Of that, $18.9 million was set aside for the company’s top five executives, to be awarded if they hit all of their goals for that year. The remaining $5 million was for bonuses to keep “key employees,” according to Windstream’s bankruptcy filing. Thomas said executives exceeded all of their 2019 financial and operational goals.

There is also a mostly new 10-member board. Nine members have been named; the 10th will be named later, the company said. Thomas and one other, William LaPerch, will continue their service on the board. LaPerch was president and CEO of AboveNet, a shuttered publicly traded provider of high bandwidth fiber-optic connectivity products and services that was headquartered in White Plains, New York. New owners Elliott Management and Oaktree Capital are represented on the board.

Two-Pronged Focus

Thomas said Windstream will be equally focused on its two largest segments, Enterprise and Kinetic.

The company has one other segment, Wholesale, which provides telecom services to resellers and telecommunication carriers. The smallest of the three segments, Windstream’s Wholesale Segment generated $362.2 million in revenue and $260.8 million in operating income in 2019.

The company’s Enterprise segment — its products and services for businesses — generated nearly $2.68 billion in revenue and $519.4 million in operating income last year.

Within that segment, strategic revenue has grown every quarter for the past six quarters. Strategic revenue is generated when business customers move from legacy technology products and services and purchase the new products and services Windstream is focused on.

Windstream’s offerings include Office Suite, Unified Communications as a Service and Software-defined Wide Area Networking solutions.

Office Suite includes videoconferencing software and technology that allows customers to make telephone calls over the internet using desktop computers or mobile devices rather than dedicated hardware. UCaas is a cloud-based platform that replaces traditional business telephone systems.

And SD-WAN allows all of an organization’s locations to be connected together efficiently and controls the prioritization of video traffic, internet traffic, voice traffic and internal data network traffic.

Even though many companies offer these kinds of products, Thomas expects Windstream’s competitive edge to come from its talent and how it goes about selling those products. One way the company sets itself apart is by tailoring offerings for each customer, he said.

“What we need to do is what we’ve always been focused on, which is hiring great people and letting them bring their skills to bear. Windstream does believe in a certain sort of philosophy,” Thomas said. “We believe in the power of small teams and a lot in agile software development as a way to develop more capabilities. It’s kind of the combination of the right people, organized the right way, focused on things that we know are winning in the marketplace today and where we have an advantage.”

Windstream targets medium-sized businesses as well as health care institutions, Thomas said.

Rural Broadband

Last year, the company’s Kinetic segment generated $2.07 billion in revenue and nearly $1.19 billion in operating income.

Kinetic for consumers, and specifically high-speed internet bundles, generated the most revenue and profit for the segment. Spokesman David Avery said revenue from both subsegments has grown during the last three quarters because Windstream has added tens of thousands of broadband customers.

Thomas said Kinetic is poised for a major infusion of capital.

“Part of the fiber to the home investment is fully funded by Uniti Group as part of a settlement we did with Uniti. So that’s really just about execution over the next year. So funding [$1.75 billion] has been fully secured for that fiber-to-home build,” he said.

Windstream had paid Uniti about $659 million per year for access to telecommunications infrastructure and other assets that power its business.

The bankruptcy court approved an agreement between the two companies in May. Uniti will also pay Windstream about $490 million and purchase certain fiber assets from Windstream for an additional $285 million under the agreement.

But Thomas said the $1.75 billion was the biggest change to their relationship and “really secures our future as a whole.”