Windstream Corp., eager to continue pushing past its ILEC roots, is buying PAETEC Holding Corp., one of the largest and most nimble competitive service providers in the United States. If all goes as intended, Windstream will become the fourth-largest business telecom services provider in the United States, behind AT&T, Verizon Communications Inc. and CenturyLink.
On Aug. 1, Arkansas-based Windstream said it will pay $891 million in stock and take on $1.4 billion of PAETEC’s debt, in a deal that should close within six months. PAETEC stockholders will own about 13 percent of the combined company. Overall, telecom analysts seem to find the purchase price is reasonable, given that Windstream is paying a 27 percent premium over PAETEC’s July 29 closing stock price of $4.42, and assuming debt.
To be sure, PAETEC assures a financial coup for Windstream. Through complex accounting methods, purchasing PAETEC allows Windstream to claim more than $600 million in tax breaks over the next five years.
“This transaction is very favorable for Windstream," said Brian Washburn, research director of network services for Current Analysis. It also bodes well for shareholders and customers since, together, Windstream and PAETEC will boast greater reach and more resources, PAETEC Chairman and CEO Arunas Chesonis told Channel Partners.
“When you combine Windstream and PAETEC, you are talking about a Fortune 500 company with $6 billion in sales, a lot of nice cash flow," Chesonis said in an interview with Channel Partners. In 2010, PAETEC alone reported $1.6 billion in revenue. “The benefit is the scale and the financial strength on top of everything else." Indeed, Windstream will hold 4.2 percent of the $65.8 billion U.S. business telecommunications services market, according to research firm ATLANTIC-ACM.
But perhaps most importantly, as the United States grapples with high unemployment rates, job cuts don’t appear to be in Windstream’s plans.
“They’re not talking about ‘operational synergies’ – like layoffs – being a major part of this combination," which is rare for a deal this size, said Washburn. “That’s a very promising sign." For Windstream, though, nothing is concrete.
“It’s way too early to start talking about layoffs," COO Brent Whittington told Channel Partners. “There’s no question that as you combine two public companies there’ll be some overlap."
One of the definites is that the executive lineup will see changes.
“I will be leaving the company," Chesonis said. The PAETEC founder intends to stay through the integration process, to “make sure we have a great merger of the companies’ operations." After that, he likely will take some time to decide what to do next. “I think my wife and I are just going to get through the rest of this year, make sure it’s a good integration and then we will decide after the holidays," Chesonis said.
