The final go-ahead has been given. All the deadlines and complications have passed. Windstream Communications (NASDAQ:WIN) is finally set to spin off its networking assets into a second company. The new company will be known as Communications Sales & Leasing (NASDAQ: CSAL), and trade under its own ticker symbol.
The spinoff is scheduled to happen after the closing bell on Friday. So it's high time to take a final look: How will Windstream change over the weekend?
Who gets CS&L shares?
If you owned Windstream shares at the end of the day on Friday, April 10, you're going to be part of this transaction. Picking up some Windstream shares before the deal closes on Friday should still come with a side of CS&L shares. If you sold your Windstream shares before the stock-based distribution date, you'll be required to deliver your freshly minted CS&L shares to the buyer of your Windstream stock.
How does that work? Well, the spinoff is technically a dividend that pays out shares of the new real estate investment trust instead of cold, hard cash. The SEC has rules in place for this kind of situation, and Windstream has explained how it plans to follow these guidelines.
"Your sale includes an obligation to deliver any shares acquired as a result of the dividend to the buyer of your shares, since the seller will receive an I.O.U. or 'due bill' from his or her broker for the additional shares," according to the SEC rulebook. All of this should be managed by your broker, with no additional paperwork for the buyers and sellers of these shares.
Windstream's stock is indeed trading via "due bills" right now. It's a transparent layer on top of the usual stock-trading process, and each Windstream share bought or sold these days comes with an "entitlement" to the CS&L stock dividend.
In other words, you can't cheat the system by selling your Windstream holdings after the date of record and then pocketing the new CS&L shares for free. That spinoff payout will still move with the shares you sold.
And if you own shares now but sell them before the split, you'll technically receive some CS&L shares but send them off to the proper owner without ever lifting an additional finger. So you'll be involved in the transaction, if only in an academic sense.
If you still have your mittens around some Windstream stock by the end of Friday, you'll get to keep those shares and receive 5 new CS&L certificates for each original Windstream share.
Immediately after that distribution, the original Windstream ticker will run through a 1-for-6 reverse stock split. Windstream's share count will shrink to one-sixth of the original number while share prices multiply by the same sixfold ratio.
And right after that, the Windstream stock will pay a cash dividend.
It's a prorated quarterly dividend, following a regular payout of $0.25 per share on April 15. With only a few days separating the two dividend payments, this one will be really small.
Every current Windstream holder will receive a payout of $0.0659, or 6.59 cents. That amounts to about 1.1 cent for each of the newly reverse-split Windstream shares. Again, the math works out to about one week's worth of the usual quarterly payment of $0.25 per original Windstream share.
The CS&L REIT will pay plenty of dividends later, but has yet to schedule its first payout.
A concrete example
So what does all of this mean for current Windstream shareholders?
Let's say you have a nice, even bundle of 100 Windstream shares as we head into the spinoff. Here's what will happen after the closing bell on Friday the 24th:
The spinoff happens, giving you one CS&L share for every five Windstream stubs in your portfolio. Now you'll have 100 shares of Windstream and 20 shares of Communications Sales & Leasing.
The reverse split happens, dividing your number of Windstream stubs by 6. Now you'll have 20 CS&L shares, 16 shares of the new, operations-focused Windstream, and a cash payment in place of any fractional shares. In this case, that'll be Friday's closing price for two-thirds of one new Windstream share, or four of the current ones. At the time of writing this, that would work out to roughly $33.40.
Then you get the prorated dividend on 16 new Windstream shares, which is equivalent to 96 of the old ones. Remember, you just sold four of your 100 shares at current market rates. So the dividend payment lands at $6.33.
At the end of the day, you're left with 16 Windstream shares, 500 CS&L shares, and a grand total of approximately $39.73 in cash.
Going forward, you should expect an annual dividend of $2.40 per share for the brand-new CS&L stock. Windstream expects to pay out $0.60 per reverse-split share, per year. So in the coming year, your 100 original Windstream shares should produce dividend streams of $48 plus $9.60, with the lion's share coming from CS&L.
What is this combination really worth?
That $57.60 total is a lightweight replacement for the $100 your old shares have been producing in each of the last eight years. If you only love Windstream for its meaty dividends, you could sell your new Windstream shares and reinvest it all into more CS&L stock. You won't be able to match today's 12% dividend yield, but CS&L is still expected to land among the five most generous yields on the S&P 500 index (where CS&L very well might find a home).
Based on Windstream's own projections and current market prices, your 20 CS&L shares should be worth about $740 at birth while the 16 Windstream post-transaction shares should add up to roughly $180. If your original 100 stubs were worth $895, the new positions will have grown to $920 -- a quick 3% increase.
Of course, that's assuming that Windstream's management knows how investors will value each of the two new stocks. There's no accounting for taste, and the actual market reaction may fall somewhere in between "slightly different" and "not even the right ZIP code" when actual trading starts on Monday.
I'll follow up with another look at the two Windstream stocks next week, when we know how investors took to the new structure. But now you know just about everything a Windstream investor should know before this game-changing event.