Uniti sucks up Windstream a decade after they parted

The merger comes almost a decade after US broadband retailer Windstream announced plans to spin off its copper and fibre networks and other fixed real estate assets into an independent, publicly traded real estate investment trust (REIT). The two firms coming back together will mean the end of the Windstream brand, the new entity retaining the Uniti moniker adopted by the wholesale and enterprise services business in 2017.

The rationale for the deal is to make the combined company more competitive. According to Uniti, bringing the two businesses together will create "a premier insurgent fiber provider in the US." While that's a slightly odd choice of wording, the firm's intention is clear: it is looking to be a stronger, challenger brand.

It needs all the help it can get. Windstream is happy to report growth in its fibre business; it had passed 1.5 million consumer premises as of the end of the first quarter and reported 401,000 consumers taking 1 Gbps and above fibre broadband services. But it is cagey with its overall data. Leichtman Research Group has estimated the size of Windstream's broadband base at 1.18 million for the past few quarters, each time putting its net additions at zero.

That estimate was just slightly too high. Uniti puts the size of the merged company's customer base at 1.1 million, highlighting the merged entity's strong presence in the Midwest and Southeast US. But the firm is up against the market's major telcos and cable operators who between them claimed almost 115 million subscribers as of the end of last year, including fixed wireless access (FWA) customers, according to Leichtman Research, and are also battling to retain cord-cutting clients. The market as a whole reported negative net adds last year, excluding the addition of 3.7 million FWA users.

Nonetheless, Uniti is optimistic about its prospects and is looking in particular at smaller markets where it counts itself as a first mover fibre builder.

The merged company will have an improved free cash flow profile which will help it build an additional 1 million fibre-to-the-home households, it said. Or, more specifically, "up to 1 million," which is not quite the same thing, but helps to illustrate the scope of Uniti's plans.

"As a combined company, we will continue our disciplined growth trajectory while expanding FTTH buildouts and significantly improving our overall financial profile. The demand for fiber broadband has never been greater, and Uniti is now expanding its reach into FTTH with an attractive scaled platform," said Kenny Gunderman, CEO of Uniti, who will also lead the merged outfit.

Gunderman also pointed to what he terms "dis-synergies that exist in the current landlord/tenant relationship," which will be eradicated as a result of the merger. Further, Uniti noted that the merger will help reduce risk when it comes to lease renewals in 2030, as well as driving capex and opex savings, and reducing debt. It expects to generate $100 million in annual operating expense synergies per year within three years of closing and $20 million-$30 million in capital expense savings. As of end-2023 the merged entity had 4.8x leverage, compared to 6x for Uniti alone.

While all of the above makes a lot of sense from a financial perspective, it surely casts some doubt over the whole concept of network asset spin-offs in telecoms. In Italy TIM recently made headlines when it confirmed that its debt pile would increase following the sale of its NetCo business, for example, when investors and market watchers were expecting an improved financial position.

The world's telecoms markets are far from homogeneous, but the fact that Windstream and Uniti are coming back together after almost 10 years apart suggests that network spin-offs are not a guaranteed silver bullet.