Windstream CEO: D&E deal a sign of market rebound
Windstream's (NYSE:WIN) acquisition of D&E Communications (NASDAQ: DECC) may be one more sign that credit markets are warming to telecom providers in recent months, suggesting consolidation activity in rural markets is likely to pick up.
Though Windstream is large enough to acquire D&E without needing to raise additional funds, improvements in the overall market likely convinced D&E to pull the trigger now, according to Jeff Gardner, Windstream's chief executive officer. And the same conditions may lead to bigger deals in coming months.
"I'm sure the fact that the credit markets had improved played a role in [the timing of D&E's decision to deal]," Gardner told Telephony Monday. "The markets have improved a lot, on both the credit and equity sides. We've seen a nice improvement in the way our stock trades in the last two months, with the broader markets being up 30%. In addition, our bonds have traded up very nicely… In general [those improvements in the market] are causing sellers to begin to think about running processes. Companies that are on the fence about whether they run a process are deciding to go ahead because they know potential buyers will have access to credit."
Last November, Gardner questioned the wisdom of Embarq's decision to sell to much-smaller CenturyTel amid a turbulent economy. But today things are different, Gardner said. "The environment is such that if we did need to raise money to do a transaction, that would be available to Windstream today because of our strong balance sheet and the improvement in the credit markets…If we can continue to produce good results, ultimately the timing will work out for us, whether it be a year or two, we'll have opportunities to do other deals the size of D&E or bigger."
According to Stifel Nicolaus analysts, the price Windstream is paying for D&E -- about $159 million in cash and stock and $171 million in assumed debt -- equates to about $2000 per access line, 2.2 times annual revenue or 5.2 times annual earnings (3.7 after synergies). And it represents a 63% premium over D&E's stock price at the end of last week.
"[D&E] was one of the few remaining publicly traded RLECs that represented a tangible [merger and acquisition] opportunity, in our view," Stifel Nicolaus analysts wrote in a research note Monday, adding that, in a report published last summer, they called D&E "the most undervalued among all the publicly-traded RLECs."
In a conference call with reporters Monday, D&E executives attributed the timing of the deal to the fundamental economics of the rural telco sector, which demand economies of scale.
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