Windstream Corporation (WIN), a fixed-line voice and DSL Internet service provider, announced a new tender offer to repurchase the previously announced 8.625% senior notes, maturing in 2016.
The new tender comprises 7.50% senior notes worth $600 million that will mature on April 1, 2023.
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, that 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 the future dividend payout ratio. However, liquidity concerns are expected to be offset 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).
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