An Oct. 20 story in the Wall Street Journal said that a group including Zayo Group is trying to buy broadband network owner Uniti Group and its principal customer, Windstream Holdings II. The Journal cites people familiar with the matter as its source.
According to the Journal, the parties involved had discussed a price of about $15 per share, which would value Uniti Group at about $3.5 billion. The talks came to a standstill over the price, according to the Journal. In making a presentation of its earnings report for the second quarter, the company said its implied share price ought to be between $20 and $30.
The price of Uniti Group shares rose 7.43 percent just before the stock market session ended on Wednesday, and the price closed at $13.01. Year-to-date, Uniti Group shares have risen by 11.58 percent, falling as low as $10.37 on June 18.
Zayo Group was a public company until 2020, when Digital Colony and EQT, as lead investors, acquired the company for $35 per share in a cash transaction valued at $14.3 billion, according to Zayo. Digital Colony later took the name DigitalBridge Group, as did Colony Capital, bringing Digital Colony and Colony Capital under the one name.
The Journal said it did not learn the terms of the transaction and said the purchase prices for the two companies would most likely be high, because Uniti Group has about $5 billion of debt, and Windstream has about $2 billion of debt.
Windstream, a telecom services provider, once was a part of Uniti Group. Windstream’s fiber-optic network became the largest Uniti Group asset when Uniti Group separated from Windstream, and Windstream entered a long-term lease for the continuing use of the fiber-optic network. Although Uniti Group has added to its customer base since the separation, Windstream still accounts for about 70 percent of Uniti Group’s revenue.
High margins and recurring revenue represent the goals Uniti Group sets for its lease-up and greenfield builds, according to the company’s vice president of finance and investor relations, Bill DiTullio. Lease-up is the act of finding or acquiring tenants. Greenfield construction is the process of developing a new building or structure on a piece of land never previously developed, according to online training company Plan Academy.
During the past few years, Uniti Group had in progress as many as 15 or 16 greenfield builds, DiTullio said. The executive spoke about Uniti Group’s business with Anthony Klarman, managing director and global head of fixed income research at Deutsche Bank during the bank’s 29th annual Leveraged Finance Conference on Oct. 5. A real estate investment trust, Uniti Group provides wireless infrastructure in the form of optical fiber routes and telecommunications towers. According to the company, it owns hundreds of wireless towers, rooftops or land for wireless tower builds. Among other wireless service providers that use Uniti Group’s infrastructure, mobile network operators use Uniti’s fiber to backhaul network traffic from towers and small cells.
“The margins on those on those initial anchor builds — they were for small cells and dark fiber to towers, mostly — the margins were 80 percent, on average,” DiTullio said. “We targeted initial cash yields of 5 to 7 percent.”
Unity Group is in the early stages of using the greenfield builds to support incremental lease-up, DiTullio said. He said the lease-up could come from adding additional wireless tenants, but most of the lease-up comes from adding on non-wireless customers, which he identified as enterprise, healthcare, government, financial institutions and schools to the federally funded ERA program.
“The lease-up comes on with margins from 70 to 90 percent, so again, 80 percent, on average, with initial yields from 5 to 7 percent,” DiTullio said. “When you layer on the lease-up, you go into cumulative yields that are in the double digits, the low- to mid-teens. If you look at the leases that we have derived over the last several years, we’ve doubled our initial yield from 7 percent to 14 to 15 percent today. That’s just Uniti Fiber,” he said, referring to the company’s fiber network that reaches more than 250,000 on-net and near-net buildings, according to company statistics.
“Then you start to add on the lease-up that we’re doing at Uniti Leasing, where we’re just primarily leasing the fiber that we have the rights to, to other parties,” DiTullio said.
Uniti Leasing makes up about two-thirds of Uniti Group’s revenue and consists mostly of Uniti Group’s master lease agreement with Windstream, according to a statement the company filed with the Securities Exchange Commission. Uniti Group was spun out of voice and data network services provider Windstream in 2015 with a substantial portion of Windstream’s network assets, and it immediately leased the entire portfolio back for Windstream’s exclusive use, the statement reads. Other leasing revenue stems from sale-leaseback transactions with other fiber holders, according to Unity Group.
“Absent that initial capital expense required to acquire that fiber, there is no incremental capex required to lease that fiber to other parties,” DiTullio said. “You’re also talking about margins that are generally 90 to 95 percent costs. When you layer on that lease-up — again, early stages there, as well — you start getting into the high teens. We’ve almost tripled our initial yield over the last five years through these lease-up initiatives. We continue to drive lease-up in our Southeast footprint, primarily Uniti Fiber, by adding tenants — non-wireless customers — as well as driving incremental lease-up.”
Turning to the business that Uniti Group does with mobile network operators, Klarman asked Paul Bullington, the company’s senior vice president and chief financial officer about the effect of the merger of T-Mobile and Sprint, and the effect of network construction by newcomer Dish Wireless.
“The consolidation of Sprint and T-Mobile is an evolving thing,” Bullington said. “They’re one of our large wireless customers. There will be some consolidation and some erosion of some of that business as they consolidate.”
Uniti Group is seeing active demand from all of the wireless industry, Bullington said. He said it has been prevalent for the past few quarters, with much of it supporting network densification, deploying backhaul towers, adding new towers and deploying C-band spectrum, and some small cell activity. He said the growth in the wireless communications market helps Uniti Group fill some of that gap that otherwise might be left by business erosion caused by the consolidation of T-Mobile and Sprint.
“Dish provides a really bright spot for us,” Bullington said. “As we lose one provider in the marketplace to consolidation, we have a new one coming. There’s a large opportunity with Dish as a new fourth provider. Dish announced that Uniti is one of its preferred fiber providers. We’ve had initial orders from Dish.”
Most of Uniti Group’s revenue from Dish will come in 2022 as the company executes the orders and delivers services, which Bullington said mostly consist of backhaul-type tower services and some market-to market-type backhaul services.
“If you’re a wireless player, and you want to turn up services quickly, then Uniti is a natural place to turn, because we have a large installed base,” Bullington said. “With towers, we have broad market coverage, especially in the Southeast, where we have a lot of our thick Uniti Fiber metro markets. The installed base of towers can enable a wireless provider to quickly cover a market without waiting months or years for greenfield fiber to be put in the ground. That makes us attractive not only to Dish, but to any wireless player looking to quickly cover an area, if it’s one of the areas that we serve.”
Bullington said that Uniti Group remains interested in greenfield builds. He said that wireless customers make great anchor tenants.
“Although we’re more focused on lease-up today than maybe we have been in the past, with some of a larger number of anchor greenfield builds that we completed mostly last year, we still have some of those that are active,” Bullington said. “We’re interested in doing more, if the numbers and the returns are there. However, I expect most of that activity to be in the Southeast.”
Don Bishop is executive editor and associate publisher of AGL Magazine.
The announcement that Windstream has been cleared by the IRS to spin off its telecommunications network assets into an independent, publicly traded real estate investment trust (REIT) has created a tremendous buzz, as well as some backlash.
The transaction will allow the REIT, which will own Windstream’s existing fiber and copper network and other fixed real estate assets, to operate tax-free. Windstream will lease back capacity from the REIT for $650 million annually.
Jeff Gardner, president and CEO of Windstream, said the REIT transaction will make the company a “more nimble competitor.” Nimble indeed.
The tax-free spinoff will enable Windstream to lower its debt by $3.2 billion and increase free cash flow to accelerate broadband investments. As a result, it will expand availability of 10 Mbps Internet service to more than 80 percent of its customers and more than double the availability of 24 Mbps Internet service by 2018, expanding to more than 30 percent of its customers.
The deal has the potential of being a game changer for telecom and data carriers, possibly portending the spinoffs of REITs at AT&T and Verizon Communications, according to Jon C. Ogg, reporter, 24/7 Wall Street. But there are some in Congress who think the growth of REITs threatens the nation’s tax base and may propose legislation to rein them in.
The tower industry is well versed in the advantages of REIT status. American Tower began functioning as a REIT at the beginning of 2012; Crown Castle International attained REIT status at the beginning of 2014. Both companies now pay out 90 percent of their earnings through dividends.
The number of REITs in the United States has grown from 136 in 2008 to 209 so far in 2014, according to the National Association of Real Estate Investment Trusts.