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Windstream (WIN) Completes Data Center Sale to TierPoint

Windstream Holdings Inc.WIN , a leading communications and technology solutions provider in the U.S, has announced closure of the sale of its data center assets to cloud computing provider, TierPoint LLC, for $575 million. Windstream looks to utilize the proceeds for debt reduction and toward funding its newly announced Project Excel that is aimed at modernizing and upgrading its broadband capabilities.

Impact of the Divesture

Following the transaction, TierPoint and Windstream will cross-sell each other's services under a reciprocal service agreement. This means the two companies will be able to sell their respective services to each other's customers through referrals. However, Windstream will not incur expenses to operate the data centers in the future. This will allow the company to focus instead on its core telecom and broadband functions while continuing to provide traditional data center services across a broader customer base. This, in turn, should create a positive impact on its margins.

Additionally, the sale will allow Windstream to fund Project Excel - a $250 million program designed to upgrade and extend the company's existing broadband network and strengthen its competitive position in the market. Upon completion of the project, the company will be able to provide speeds of up to 50 Megabits to its rural customers. This, successfully done, will mean enhanced customer experience and robust market share gains, resulting in higher ARPU.

Moreover, Windstream has a highly leveraged balance sheet. The company exited the third quarter of 2015 with $97.2 million of cash and cash equivalents compared with $103.7 million at the end of Sep 30, 2014. Long-term debt at the end of the third quarter totaled $5,693.4 million. While the company is extensively increasing investment to expand its operations, it is doing so through debt, thereby straining its financial position. Windstream believes that the proceeds from the sale of its data center assets will enable debt reduction of approximately $300 million, resulting in a stronger balance sheet.

Industry Trends

In the recent years, telecom operators have been actively purchasing data center and cloud service providers to counter shrinking revenues from their traditional telecom services. Notable ones are Verizon Communications Inc.'s VZ $1.4 billion acquisition of Terremark and CenturyLink Inc.'s $2.5 billion acquisition of Savvis. However, persistent sub par performance in this segment has resulted in investors calling for a sale of these assets. Recently, AT&T Inc. T decided to divest its data center business to International Business Machine Corporation IBM . CenturyLink too is reportedly looking to sell its data center portfolio.

The Bottom Line

It is clear that Windstream identifies telecommunications as a major growth driver. The company is focusing to increase its on-net fiber buildings (buildings supported by the company's own fiber-based network) footprint. Currently, Windstream pays as much as $1 billion per year to incumbent local exchange carriers (ILEC) like AT&T and Verizon as special access fees. These fees allow Windstream to access the ILEC's wholesale network to deliver services to its multisite enterprise customers where the company does not have a last mile network facility. The company is currently striving to optimize its last mile network in a bid to cut costs.

Windstream currently carries a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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