Windstream fulfilling dealmaker dreams

Rural telco consolidation has been a pet topic of Wall Street for about a decade, when the largest telcos were first looking at off-loading their least-lucrative access lines in smaller markets. Nothing much happened until a few years ago, when the rural telco ambition and economics found the common need to make sense of consolidation. This also happened to be about the time that the deal-making environment seemed able to support what companies like Verizon Communications expected to get for their rural properties (Verizon, also probably fearful about the value of those lines continuing to decline, was more ready to make deals than ever).

Windstream Communications was one of the first products of an initial wave of rural consolidation, created from the merger of Alltel's landline assets with fellow independent telco Valor Communications Group, which itself had grown from an acquisition of former indie giant GTE. Windstream also was seen, nearly immediately, as a potential buyer and consolidator of other rural telcos.

In the intervening years, however, Windstream mostly stayed away from big deals. As FairPoint Communications acquired Verizon's New England lines, CenturyTel and Embarq formed CenturyLink and Frontier Communications moved to acquire other Verizon lines, Wall Street wanted to know why Windstream wasn't in the mix. Several times on quarterly earnings calls during this period, Windstream president and CEO Jeff Gardner was called on to explain why it wasn't Windstream merging with Embarq, or why Windstream wasn't leading the consolidation wave, as so many analysts had expected and apparently hoped.

Gardner always reminded them that Windstream was indeed making deals, smaller buys of firms like CT Communications and D&E Communications. He also noted that Windstream wasn't going to make an acquisition just to get bigger--the deal had to be right strategically and economically. It had to be accretive, to use one of those words you rarely hear anywhere but on an earnings call. Through a difficult economic stretch and in the wake of the FairPoint debacle, in which FairPoint bit off much more than it could chew, this tone has only gained wisdom.

Windstream has stuck to it model of finding smaller properties that seem a good fit, rather than trying to climb too quickly up the ladder of access line rankings. Though, within the last year, it has definitely stepped up its pace, buying Lexcom, and moving to acquire Nuvox and, most recently, Iowa Telecommunications. Yet, even while the heart rate quickens, these deals all fit a similar profile that Windstream investors should find soothing. They have been for the most part deals under $1 billion (the Iowa Telecom bid barely breaks from that trend). They also have been deals that help Windstream extend further into new segments, business communications and TV, for example, without putting them in line to pay for someone else's too-expensive capex ambitions.

It is ironic then that for all of Windstream's step-wise conservatism, and for all its restraint while patiently and gradually fulfilling all the expectations for the company to become consolidator extraordinaire, the company recently was awarded this black eye: "Rating Watch Negative." That's what Fitch Ratings said recently about credit concerns over Windstream's acquisition binge (though to my mind, it has not been a binge so much as a single, progressive multi-course dinner in which each plate was a bit larger than the last).

Windstream appears to have been about as careful as a company can be with acquisitions, so careful that it has been mocked for letting previous big deals land elsewhere. Something tells me Gardner and company have not suddenly lost their ability to manage their appetite. There has been recent speculation that Windstream is eyeing more acquisitions, with successful telco TV player Consolidated Communications and the battered FairPoint as possible targets. Going for FairPoint might only raise concerns, though Windstream could hardly do worse managing the company. As a telco with isolated properties in three states, Consolidated appears to fit Windstream's profile nicely, but as Gardner and company continue to fulfill Wall Street's expectations, will they only get more grief for their efforts?