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Weekly UpdatesEXPANSION IS KEY TO THE RURAL TELEcom industry, and a recent round of consolidation has left Windstream Corp. of Little Rock with few "transformational" options. In the last year, two deals created rural local exchange carriers--known as RLECs--that serve more than 7 million access lines, while Windstream kept relatively quiet.
The deals allow RLECs to create efficiencies in the land-line industry, which loses customers each year to wireless and cable companies. However, after the latest deals, industry analysts say the pickings are slim for Windstream, which posted fiscal 2008 revenue of $3.17 billion and serves more than 3 million access lines in 16 states.
"Windstream is certainly a company that would like to expand at some point, but there is very little out there of a certain size" that the company could pursue, said Christopher King, senior analyst with Stifel Nicolaus & Co. of St. Louis. "There are certainly no other RLECs of any size that Windstream could buy to make a tangible difference in the company."
The company did make a relatively small deal in May, purchasing D&E Communications of Ephrata, Pa., in a deal worth $330 million that will add 165,000 access lines to Windstream's existing network.
Pursuing smaller acquisitions is the best option for Windstream, telecom analyst Donna Jaegers said. "I think it is a good strategy, in that it is easier to integrate and because of the high synergies--small bites, one at a time," said Jaegers, a senior analyst at the Portland, Ore., investment bank of D.A. Davidson & Co Inc.
Windstream's CEO, Jeff Gardner, addressed the company's philosophy on large mergers and acquisitions during May's JPMorgan Global Technology, Media & Telecom Conference.
"I think we have the team and the talent and the scale at Windstream to look at those deals over time," Gardner said. "So it's not that we are against any kind of transformational deal. We have just not been in a position where we had an opportunity to execute a deal that made sense for us."
The dearth of transformational opportunities arose after two RLECs merged to form CenturyLink Inc. of Monroe, La., and Frontier Communications Corp. of Stamford, Conn., bought more than 4 million access lines from Verizon Communications Inc.
CenturyLink was formed July 1 when the $11.6 billion merger of CenturyTel Inc. of Monroe, La., and Embarq Corp. of Overland Park, Kan., was finalized on July 1. (See story, Page 1.)
Similarly, Frontier announced it would buy 4.8 million access lines from Verizon Communications Inc. for $8.6 billion. Once the deal is finalized, Frontier will have about 7 million access lines and operate in 27 states.
In order to "move Windstream's needle," the company would need to buy an exchange carrier of about 20 percent its size, King, of Stifel, said.
Windstream's reluctance to merge last year might soothe investors.
"I think there is a fear by investors that Windstream is wanting to make a big acquisition. I don't think that's likely," Jaegers said.
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