Windstream Corporation (WIN), a fixed-line voice and DSL Internet service provider, announced the maximum limit to purchase 8.625% senior notes, maturing in 2016.
The company will now purchase 8.625% senior notes of $1,100 million for cash as against the previously announced amount of $600 million. Accordingly, the company has proposed a new tender offer that comprises senior notes worth $500 million, maturing in 2021.
Previously on March 2, 2011, the company proposed a tender offer to sell 7.50% senior notes worth $600 million that will mature on April 1, 2023. Windstream will now utilize the amount drawn from the offers, maturing 2021 and 2023 to buy back a total of 8.625% senior notes worth $1,100 million, due 2016.
Windstream’s balance sheet remained distressed at the end of fiscal 2010, with a heavy debt, minimal cash balance and a leverage ratio of 3.66%. The company had roughly $7.2 billion in long-term debt, up from $6.3 billion at the end of 2009. Cash and cash equivalents plummeted to $42.3 million from $1,062.9 million in the prior year.
The company’s ongoing acquisitions to expand its coverage market and subscriber count have strained the balance sheet as they are predominantly being funded through debt. Despite the highly leveraged balance sheet, the company reported adjusted free cash flow of $818 million in 2010 that resulted in an impressive dividend payout ratio of 57%.
Windstream’s healthy free cash flow, mostly generated through the ongoing cost-cutting initiatives, will support the high dividend payout, at least over the near term. Notably, the company’s dividend is well above its Tier- 1 peers AT&T Inc. (T) and Verizon Communication (VZ). In 2011, Windstream expects adjusted free cash flow of approximately $863 million to $973 million and dividend payout ratio of approximately 52% to 59%.
We believe increasing debt may temper the company’s long-term performance affecting its future dividend payout ratio. However, liquidity concerns are expected to be compensated by growth and opportunities ahead.
The company’s focus on expanding broadband business via acquisuitions andinvesting in fiber-to-the-cell projects and data center expansions are also expected to fuel growth.
We are currently maintaining our long-term Neutral recommendation on Windstream with a Zacks #3 Rank (Hold).
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
WINDSTREAM CORP (WIN): Free Stock Analysis Report
Zacks Investment Research
