Windstream continues M&A roll with $2.3B PAETEC acquisition

Windstream (Nasdaq: WIN) is enhancing its business and cloud service mission by crafting a deal to acquire PAETEC (Nasdaq: PAET) for $2.3 billion.

Under the terms of the agreement, which has already been approved by the board of directors of both service providers, PAETEC shareholders will receive 0.460 shares of Windstream common stock for each PAETEC share owned under the terms of the agreement which was approved by the boards of directors of both companies. The two service providers expect the deal to close in the next six months.

Jeff Gardner, Windstream

The deal "significantly advances our strategy to drive top-line revenue growth by expanding our focus on business and broadband services" -- Jeff Gardner, President & CEO of Windstream

To fund the deal, Windstream will issue about 73 million shares of stock valued at about $891 million based on its closing price on July 29, 2011. In addition, Windstream will assume or refinance PAETEC's net debt of approximately $1.4 billion at the time of closing. 

Excluding $50 million in merger and integrating costs and about $55 million in capital expenditures over the first three years after the deal is completed Windstream expects the acquisition to be accretive to free cash flow per share.

Although the combined company won't be nearly as large as fellow ILEC CenturyLink (NYSE: CTL), Windstream becomes a large Fortune 500 competitor with the ability serve business customers in 46 states and the District of Columbia and about 100,000 nationwide fiber route miles.

While gaining new network assets is certainly a boon for Windstream, the key piece here is services. By acquiring PAETEC, Windstream will be able to enhance its metro fiber, Ethernet, data centers and managed services portfolio.

As the largest of the eight acquisitions Windstream has made since being spun out of former Alltell as a standalone company, Jeff Gardner, president and CEO of Windstream, said that it "significantly advances our strategy to drive top-line revenue growth by expanding our focus on business and broadband services."

Ed Gubbins, senior analyst, New Paradigm Resources Group (NPRG), in an interview with FierceTelecom concurred that the new acquisition will help advance the ILEC's business and cloud services vision.

"Windstream has made eight acquisitions in the past five years or so, while PAETEC acquired Xeta in February after buying Cavalier last year so they've both been busy," he said. "But those acquisitions show that these companies were moving in the same direction--toward cloud-centric business services--so that should help their momentum as a unified entity."

Gubbins believes that Windstream's M&A spree is far from over as the service provider needs to look at opportunities to expand its presence on the West Coast.

"Windstream will obviously have its hands full for the next year or so with this acquisition, but I wouldn't be surprised to see another deal before too long," he said. "If you look at the network map of the combined company, you can see there's a lot more they could be doing on the West Coast. And to offer the kind of multi-location, cloud-based business services that Windstream wants to offer, they'll need to grow their presence significantly out west, too."

Outside of the West Coast, David D. Tawil, Co-Founder & Portfolio Manager, Maglan Capital, believes that the acquisition could make fellow ILEC FairPoint Communications (Nasdaq: FRP), which has also been aggressively upgrading its core network to serve more residential and business customers, a possible acquisition target for Frontier Communications (NYSE: FTR).  

"Because the PAETEC acquisition expands Windstream's footprint in New England" it could mean that "FairPoint is the better acquisition target," Tarwill said.  

For more:
- see the release

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