One fine Friday in the middle of April 2015, Windstream Holdings (NASDAQ:WIN) was just another regional telecom with enterprise-service aspirations and a $1.25 billion market cap. The next Monday, Windstream had split off its hardware and real estate assets into a new company known as Communications Sales & Leasing (NASDAQ:CSAL), and the stock would never be the same again.
Windstream's share price has fallen 48% since completing that business split, and the new CS&L stock has declined by 33%. So the stocks are definitely moving down.
At the same time, however, CS&L's market cap stands at a cool $3 billion today. Add in Windstream's $630 million cap, and the combined market value is nearly triple the value of Windstream before the split.
Fortunately, the answer is quite simple. Market caps are fine and dandy to use as quick proxies for true market value, but they aren't perfect. In fact, they're not even close.
Consider the enterprise value instead. This figure starts with the good old market cap, but then increases with the size of a company's debt, and decreases in tune with cash reserves.
It's like buying a used wallet at the flea market. If you find some cash inside, the true cost of that billfold becomes lower. An IOU note, fully transferred to the wallet's new owner with no hope of avoiding it? Yeah, that item just became a whole lot more expensive.
Windstream's enterprise value in mid-April stood at exactly $10 billion. CS&L took a lot of the parent company's debt with it into the new venture. The companies also took this opportunity to retire some debt, although the enterprise value hardly moves when you do that. After all, you're taking cash out of one pocket, paring it with debt notes from the other, and sending both on their merry ways. The cash payments cancel out the lower debt balances in the short term -- but will save money in the long run, thanks to lower interest payments.
By the end of June, Windstream's enterprise value had dipped to $6.3 billion, while CS&L's EV stood at $3.5 billion. Add them up, and you get a total enterprise value of $9.8 billion -- just a smidge lower than Windstream's old market value.
The CS&L spin-off neither created nor destroyed massive amounts of investor value right off the bat. Market caps and share prices may have created that illusion, but that's all it was.
Today, the enterprise values of Windstream and CS&L sit at roughly $6.2 billion and $2.8 billion, respectively. Together, we're talking about $9.06 billion. That is indeed a significant decline from the mid-April level, to the tune of $940 million, or 9.4%. But it's a far cry from the much larger share price and market cap plunges these stocks have seen, and I believe that the enterprise values paint a picture that's more fair and correct.
You should also consider that CS&L has paid out $153 million in two dividend checks during its short life, and Windstream funneled $26 million into dividends during the same period. In that light, you could argue that the total damage to shareholder pocketbooks so far stops at $760 million, or 7.6%.
There's no telling where the two stocks will go from here, of course. Short-sellers are betting heavily against Windstream, as 26% of its market float is sold short today. The effective dividend yield stands at 9.9%, indicating either a doomed business model, or a heavily discounted stock. CS&L's effective dividend yield stands at 12%, with 7% of its float sold short.
By picking up some CS&L shares two months ago at prices comparable to today's levels, I'm personally betting against the short-sellers, and locking in some great dividend yields. The company will publish its second-ever earnings report on Friday morning, shedding some new light on how that investment is doing. I'm hoping for CS&L to list some new clients not named Windstream.
In the meantime, I'm counting my dividend pennies.