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High-Yielding Telecom's Acquisition Threatened

By Dan Radovsky - Updated Apr 6, 2017 at 6:34PM

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A rumored bidding war may threaten Windstream's acquisition plan.

Dividends have become so important recently for many investors, not only because of the pitifully low yields from many forms of bonds, but also because of the cushion they can give investors during volatile market swings, such as we are presently seeing.

Investors have continued to look to the telecom industry to provide higher-than-average dividend yields, and Windstream (Nasdaq: WIN) is one of those second-tier telecoms that recognizes the value of its high-yielding dividend.

"We remain incredibly focused on the dividend at Windstream and understand how important this is to our shareholders," said president and CEO Jeffery Gardner during the company's second-quarter conference call last August.

Here are the yields for Windstream and its major second-tier rivals, along with two top-tier telecoms.

Company

Projected Yield

Payout to Free Cash Flow Ratio (TTM)

Windstream 8.9% 78%
Frontier Communications (NYSE: FTR) 12.8% 82%
CenturyLink (NYSE: CTL) 8.4% 58%
AT&T (NYSE: T) 6.1% 71%
Verizon (NYSE: VZ) 5.5% 47%

Source: Morningstar; TTM = trailing 12 months.

Acquire or die?
But these smaller telecoms have seen their ability to keep paying those dividends threatened by the steady shrinking of their core fixed-line phone service revenues. To halt these declines, those companies have eagerly pursued acquisitions in order to transition into other telecom areas. Windstream, though not quite as aggressively as Frontier and CenturyLink, has gone the acquisition route to increase its value as an Internet access provider.

To that end, last August Windstream struck a $2.3 billion stock-swap and debt-assumption deal to acquire PAETEC (Nasdaq: PAET), one of the largest competitive local exchange carriers in the country. This would give Windstream a national fiber network of 100,000 route miles. Windstream's Gardner said that following the deal "... roughly 70% of our revenues will come from business and broadband services, which are the growth drivers of our business." Those services now make up 61% of Windstream's business.

Gardner also said, "I think PAETEC is a deal that really sets Wind[stream] up to grow in the business space and is a great strategic fit ..."

It ain't over till it's over
But this is not yet a done deal, and can't be finalized until PAETEC shareholders vote on it later this month. Two law firms are now conducting investigations on behalf of shareholders into whether the $5.62 a share the deal would bring is a fair price. One of the law firms reports that financial analysts feel that PAETEC should go for $7 a share.

And last week, one analyst hinted that Level 3 Communications (Nasdaq: LVLT) will make a competing bid for PAETEC, one that could bring as much as $7.30 a share. Yes, that is the Level 3 that just acquired Global Crossing.

What next?
Right now the Level 3 rumor is just that, a rumor. But it may just put enough doubt into the minds of the PAETEC shareholders about whether they should go through with the deal. Any investor, or potential investor, in Windstream, would then be well advised to click here to keep a close watch on the company by placing it on My Watchlist.

Or, put all of the above-mentioned companies on My Watchlist by clicking here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Windstream Holdings, Inc. Stock Quote
Windstream Holdings, Inc.
WINMQ
Level 3 Communications, Inc. Stock Quote
Level 3 Communications, Inc.
LVLT
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$50.27 (-2.69%) $-1.39
AT&T Inc. Stock Quote
AT&T Inc.
T
$22.83 (-4.44%) $-1.06
Lumen Technologies Stock Quote
Lumen Technologies
LUMN
$12.34 (-4.71%) $0.61
Frontier Communications Corporation Stock Quote
Frontier Communications Corporation
FTR

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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