Windstream CEO: D&E deal a sign of market rebound

"We're too big to be little and too little to be big," said James Morozzi, D&E's president and chief executive officer. Asked if the company's recent financial performance helped dictate the timing of the deal (like many telcos, D&E lost money last year and in the first quarter), he said, "I wouldn't say we felt pressure or that those specific results were driving forces. But there clearly was a strategic review. There was a point of view by all of us in the management team and the board of directors that bigger is better."

D&E'S VIDEO

In addition to its 118,000 access lines, 47,000 competitive local exchange carrier lines and 44,000 DSL subscribers in rural Pennsylvania, D&E will give Windstream a base of about 8500 terrestrial video subscribers in two markets: State College and Lewisburg. Using its own video headend in State College, D&E has grown its video subscriber base 6% last year and 7% the year before. Windstream, which generally relies on a satellite partner for video services rather than a terrestrial offering (though it has about 31,000 cable customers in Georgia and Missouri), said it will continue to serve D&E's video customers as it examines longer term questions. 

"Whether that's scalable to our other markets is something that we'll look at," Gardner said, adding that Windstream is also likely to sell its own satellite service in those markets where D&E currently offers terrestrial video. "We'll take a hard look at it. There's probably an opportunity for us to learn more about how they've made this work in these markets to see if there's any application to the broader Windstream footprint."

According to Windstream, D&E offers video over two different technologies in the two markets – a hybrid fiber coaxial network in State College (where D&E operates as a competitive local exchange carrier) and ADSL2+ in Lewisburg, where D&E is the incumbent phone provider. (SureWest Communications has a similar duality.)

"We've done video really well," D&E's Morozzi said. "We've got good network in place. And it seems a natural to continue to expand that."

D&E also has six 700-MHz wireless spectrum licenses, acquired in auction, that cover 1.3 million points of presence in central Pennsylvania. It also has nearly 1000 Web hosting customers and offers collocation and business continuity services.

POISON PUTS

According to the Wall Street Journal, Windstream was prevented from being a more serious contender for Embarq's assets due to restrictive change-of-control provisions in its debt covenants. Gardner said those become less problematic as the overall market improves, and their impact is specific to each potential transaction.

"We do have change-of-control features in our bonds that say that, in the event we do a transaction and there's a change of control as defined in the covenants, that we may have to refinance those bonds," Gardner said. "That was difficult when the markets were really challenging and will be less difficult when they're not. It's played a significant role in a couple of the auctions out there in terms of accessibility to the credit markets. I don't think it's going to, at the end of the day, preclude us from doing anything. But it's certainly something we have to pay very close attention to as we look at our options."