Windstream's $2.3B PAETEC buy enhances its business service foothold

Sean Buckley, FierceTelecomWindstream (Nasdaq: WIN) once again went to the M&A well this week to acquire CLEC PAETEC (Nasdaq: PAET) for $2.3 billion, an deal that, once approved, will immediately enhance the provider's once voice-only standing in the business services market.

Unlike its two main independent ILEC brothers, CenturyLink (NYSE: CTL) and Frontier Communications (NYSE: FTR), Windstream may be the most conservative when it comes to mergers and acquisitions, yet each deal--like PAETEC--is targeted on adding new pieces to its growing service and network puzzle.

The new deal, as pointed out by Ed Gubbins, senior analyst at NPRG, may create "a new Fortune 500 company-- but it will still be less than half the size of that other acquisitive former RLEC, CenturyLink, in terms of revenue, fiber miles and data centers."

Its two main targets in driving new top-line growth, Windstream's CEO and President Jeff Gardner said in announcing the deal yesterday, are "business and broadband services."

With that ongoing theme in hand, what does the PAETEC deal specifically provide to Windstream?

Much like its acquisition of the former NuVox Communications in 2009--Windstream's first CLEC acquisition--the most obvious answer is that acquiring PAETEC will immediately bolster not only the ILEC's network holdings, but more importantly, will enhance the service set it can deliver to business customers.

From an overall asset point of view, Windstream will have a 100,000 route-mile fiber network when the deal is complete. In addition, it will enhance its growing portfolio of metro fiber, Ethernet, data centers and managed services, including cloud services.

Another growing key piece of the assets will be cloud computing. Prior to Windstream's bid for PAETEC, both service providers had been separately ramping up their cloud capabilities.

Windstream, while still in the early stages of establishing its cloud strategy bought out the former Hosted Solutions and since then has expanded its data center capabilities in both the North Carolina and Boston markets. Likewise, PAETEC earlier this year hatched a plan to add 13 new data centers in its markets by 2013.

Along with upping their cloud capabilities, Windstream will also be able to take advantage of PAETEC's recently completed acquisition of the former Cavalier Telephone and its aggressive Intellifiber subsidiary. Intellifiber, in particular, brings a high degree of fiber assets, but also a sizeable set of public sector customers, including the DoD, and a growing Ethernet over Copper (EoC) network that can be used to target both SMBs and larger businesses with multiple remote offices.  

But even though the ink is barely dry on the announcement, a number of rumors already flying that other ILECs, namely Frontier, will make an acquisition move.

One investor believes that Windstream's acquisition could inspire Frontier, which is still in the process of integrating its former Verizon rural lines, to purchase FairPoint (Nasdaq: FRP). Fairpoint has suffered through bankruptcy and service issues in its New England market, and one theory is that Frontier CEO Maggie Wilderotter is the better leader for a combined Frontier/FairPoint.

David D. Tawil, Co-Founder & Portfolio Manager, Maglan Capital told FierceTelecom when the Windstream/PAETEC deal was announced that "FairPoint is the better acquisition target now" for an ILEC like Frontier.    

Of course, when Frontier was asked to comment, their response was that they "are focused on systems conversion" and expanding their broadband footprint.

Given the fact that Frontier is still going through what is already a very large acquisition of Verizon's neglected rural lines, it's probably unlikely Frontier would want to take on another deal.

In Windstream's case, PAETEC won't likely be its last acquisition.

While the service provider now has a well-established foothold in the Midwest and North through its purchase of PAETEC and other smaller providers, the key piece it's missing is the West Coast.

Ed Gubbins believes that in order "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."

Speculation aside, the reality is that independent ILECs like Windstream are looking to grow outside of the PSTN box, and they'll likely continue to drive new innovation through organic growth and targeted M&A trend.--Sean

P.S. Please take a minute to say hello to our new FierceCable editor Steve Donohue, who joined our wireline team this week.