Windstream Transaction Raises Speculation About Implications of AT&T REIT

Windstream’s decision this summer to spin off telecom network assets into a real estate investment trust, or so-called REIT, has triggered speculation on whether other U.S. telecommunications providers will follow the same path in order to extract value for shareholders.

The tax-free spinoff, Windstream said in July, would enable the company to lower debt by $3.2 billion, boosting cash flow in order to accelerate investments in broadband. As part of the transaction, Windstream shareholders will retain shares in the company and receive shares in the REIT in accordance with their ownership interest.

Clinton Holmes, president of Black Coral Research, raised an interesting question in the wake of Windstream’s announcement: How would AT&T shareholders be affected if AT&T spun its real estate assets into a REIT? One of the benefits of a REIT, he explained, is that it can distribute more than 90 percent of taxable income to unit holders without paying tax.

Were AT&T to spin off $275 billion in assets into a REIT, yielding $11 billion in annual income, an investor with two shares of the telecom titan before the transaction could reap an immediate capital gain of $68 and an increase in annual distribution of $1.32 per share on the low end, Holmes calculated in an article that was written for Seeking Alpha.

“It is clear a spin off of AT&T’s real estate assets into an REIT could unlock significant value for AT&T shareholders,” he wrote, “but it is important not to lose sight that all of this is just hypothetical.”

Holmes’ findings were contingent on a number of assumptions that he acknowledged could be very different depending on how AT&T structured such a deal.

He also said he was not aware that AT&T was considering a REIT.

Although a private letter ruling from the IRS to Windstream could incentivize other carriers to explore REITs, ANPI Chief Marketing Officer David Byrd expressed some reservations about the big carriers moving in that direction.

“However, early consensus is that while a few facilities-based IXCs and CLECs may decide to take advantage of this form of tax shelter, the larger ILECs, such as AT&T and Verizon, may choose to avoid exposing their networks to competitors at regulated rates,” he wrote in an article for Channel Partners. “Time will tell if that interpretation holds, since the tax savings to Windstream is estimated to be between $100 million and $200 million.”

Windstream expects to complete its proposed spinoff in the first quarter of 2015, subject to final approval by the board of directors, regulatory approvals and other closing conditions.

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