Regional telecom Windstream Holdings (WIN +0.00%) has had an unpleasant year, to say the least. Shares have shed three-quarters of their value in the past 12 months, as competitive pressures, difficult technology transitions, and a high debt load sent investors into a panic over possible insolvency. Recently, shares tumbled toward $1-per-share, a potentially dangerous level for the stock.
In response, management recently executed a five-for-one reverse split, shrinking the share count 80% while quintupling the share price to $6 per share. Of course, a reverse split doesn't change the value of the company, which has a market capitalization of around $230 million (though it has over $10 billion in debt and long-term lease obligations). So, at first glance, the reverse-split may seem arbitrary. However, there were some important defensive reasons behind the move.
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A small fish in a national pond
Regional telecoms like Windstream have typically provided telephone and internet services over copper wires, but these days, people are dropping landlines in droves, and national cable companies are delivering broadband services over cable or fiberoptic lines at much higher speeds.
On top of that, the telecom industry has consolidated in recent years, which has made it doubly difficult for Windstream to invest in the latest technology and sell it for a fair price against behemoths AT&T (T +0.00%), Charter Communications (CHTR +1.63%), or Comcast (CMCSA 0.43%).
Windstream has recently made a valiant attempt to scale up, buying both Earthlink Holdings and Broadview Networks last year. But that has only piled on the debt at a time when the core Windstream business has been shedding subscribers. In other words, it may be too little, too late.
The reason for the reverse
Typically, a company does a reverse split for two reasons. One is to attract institutional investors, as certain investment funds may be hesitant to buy stocks under $5. However, it's not really the case anymore that institutions automatically shun low-priced stocks. Those informal rules were written when brokers were paid based on how many shares sold, which is a less common practice these days.
The more likely reason is that Windstream sought to avoid being delisted by the exchanges. If a stock falls under $1 and stays there for 30 consecutive days, the exchanges can initiate a delisting process. As Windstream's stock hit almost $1.20 per share prior to the split, that was likely too close for comfort for management.
Now that that's out of the way...
In what likely wasn't a coincidence, just five days after the reverse-split, Windstream proposed a consent solicitation for holders of its $600 million 8.625% senior first lien notes. The solicitation asks senior note-holders to allow Windstream to assume more junior debt, while also allowing for amended inter-creditor agreements. In return, Windstream is offering a consent payment of 2.5% on the principal (or, up to $15 million).
Unsurprisingly, the announcement of a) more debt and b) extra payments for the privilege of taking on more debt, sent shares tumbling again. But since the stock had already reverse-split, shares weren't in danger of going below $1.
Is there any hope?
Windstream is having to do financial jiujitsu just to keep itself afloat at the moment, all while posting net losses of $156 million in its most recent quarter. Management would probably steer investors to the "adjusted" free cash flow metric, which nets out consulting fees, restructuring costs, merger costs, integration expenses, and stock-based compensation. That figure came in at a positive $65.5 million last quarter, a stark contrast from the GAAP net loss figure.
Still, with all the adjustments the company is making, one wonders just how "one-time" those costs are. In addition, the company spent far less in adjusted capital expenditures ($207.7 million) than depreciation ($381 million) last quarter, which makes one wonder if Windstream is adequately investing in its business.
Circling the drain or deep-value proposition?
The first maturities of Windstream's debt don't hit until 2020, so the company still has a couple years to figure things out; however, a substantial $493 million in junior debt comes due then, and if the company doesn't extend its 2021 senior credit facility by April 2020, a whopping $1.19 billion comes due at that point. So, theoretically, Windstream could be on the hook for roughly $1.7 billion total in 2020.
If management can navigate the next two years and convince lenders to extend maturities, there could be lots of upside, given Windstream's beaten-down stock. Still, the risk of insolvency is just too great for me. All but the most speculative investors should stay away from Windstream until the business shows a path to improved (and sustainable) profitability.
