Telecom & Wireless

Can a Data Center Sale Really Help Windstream Shares Double?

Windstream Holdings, Inc. (NASDAQ: WIN) is a very controversial stock, and many investors and analysts simply do not like the stock at all – whether it has a high dividend yield or not. A report on Monday from Merrill Lynch is talking up the potential valuation here after its announced sale its data center business to TierPoint in an all cash transaction for $575 million.

What stands out here is that Merrill Lynch is the most optimistic of all Wall Street analysts by far when it comes to Windstream. Their most optimistic rating and target comes with a price objective that is all the way up at $16.00 on a sum of the parts analysis. What investors need to consider is that a sum-of-the-parts analysis is not generally the same as an earnings or cash flow analysis, and these are often valuing parts or assets of a business very different from how other investors see things.

David Barden and Joshua Frantz, the analysts making the call on Monday, pointed out that Windstream will maintain a partnership with TierPoint. Keeping that relationship will allow Windstream to continue to sell data center products to its customer base.

The data center segment generated revenue of $30.5 million and adjusted EBITDA of $10.2m in the second quarter. On an annualized basis that is roughly $122 million and $40.8 million, respectively; and Windstream said that the business was growing in the low to mid-teens. Monday’s report focuses on the following positives:

  • Windstream sold the business at a premium multiple to where Windstream trades currently (3.9x on 2015E EBITDA as of Friday’s close;
  • it can use the proceeds to reinvest into the business or pay down debt;
  • and the transaction opens up a new customer base for Windstream’s products.

Another reason that this is good for Windstream is that it gets rid of overhead and capital spending for no-return efforts. The report said that the company would spend between $30 million and $50 million in cap-ex, implying that the business generated very little or no real free cash flow. Still, the sale was shown to not impact Windstream’s cap-ex guidance for 2015 — last pegged at $825 million to $875 million. Despite being 2% of total revenues, it represented only about 3 basis points of negative impact on its net revenue growth.

Merrill Lynch also said in its research report that this sale offers a positive view for Communications Sales & Leasing, Inc. (NASDAQ: CSAL). They said:

As we have highlighted in the past, a healthier Windstream is a positive for Communications Sales & Leasing as the two companies appear to be linked together from a debt rating agency standpoint. Windstream currently owns 19.6% of Communications Sales & Leasing which is ~$5.80 per Windstream share compared to its closing price on Friday of $6.85.

The 7.6% target yield estimate is also said to be at the high end of the range of yields for triple net REITs. We assume a higher yield will be required at least until this new REIT establishes a trading history.

Windstream closed up 1.3% at $6.954. That $16.00 price objective would imply more than 100% upside, but this is also 100% over the consensus analyst price target of $7.53. Investors often discount or eliminate any “halo effect” for stake ownership and hidden value.

In short, that Windstream price objective of $16.00 just seems like there is fuzzy math being used for its real value. Many companies have owned big stakes (sometimes controlling stakes) in assets, companies or ventures and have been very difficult to unlock the value in there. That being said, other investors and other analysts might heavily discount the views here in this call when it comes to that value.

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