Windstream says $1.1 billion merger to be ‘significantly deleveraging’

By Devika Patel

Knoxville, Tenn., Nov. 7 – Windstream Holdings Inc. plans to acquire EarthLink, an Atlanta-based IT services and communications provider. The transaction is valued at about $1.1 billion, including debt. Windstream said it plans to refinance EarthLink Holdings Corp.’s gross debt of about $436 million in connection with the merger.

“Windstream will refinance Earthlink’s debt, totaling approximately $436 million,” president and chief executive officer Tony Thomas said on the company’s conference call announcing the merger and the company’s earnings.

“This transaction does meaningfully improve our free cash flow and enhance our leverage,” Thomas added.

“Obviously, this transaction is a significantly deleveraging transaction for us that takes our leverage down 0.3x initially and then about a half a turn after the realization of the synergies and so that puts us in a very comfortable position of being in the low 3x leverage range,” chief financial officer Robert E. Gunderman said on the call.

“That’s a good spot for us; we’re comfortable operating in this range and we feel good about our ability to operate the business based upon that positioning,” Gunderman said.

Gunderman also elaborated on the company’s recent financial activities, which included redeeming its 7 7/8%% senior notes due 2017 in full and refinancing and increasing the term loan B-6 to $750 million from roughly $699 million.

“We improved the debt maturity profile with the redemption of the remaining 2017 notes and reduced future cash interests,” Gunderman said.

“We further optimized our balance sheet. In September, we refinanced our existing term loan B-6, improving the interest rate by 100 basis points.

“We added an incremental $150 million term loan and used the proceeds along with revolver borrowings to redeem the remaining 2017 notes.

“This significantly enhances our debt maturity profile and reduces future cash interest,” Gunderman said.

The company has an attractive debt maturity profile with no near-term maturities, he added. It expects $325 million in cash interest expense in 2017.

Merger highlights

Under the merger agreement, EarthLink shareholders will receive 0.818 shares of Windstream common stock for each EarthLink share owned. Windstream expects to issue about 93 million shares of stock valued at roughly $673 million, based on the company’s closing stock price on Nov. 4.

At closing, Windstream shareholders will own about 51% and EarthLink shareholders will own around 49% of the combined company.

Including run-rate synergies, on a pro forma basis for the 12 months ended Sept. 30, the combined company would have a net leverage ratio of 3.2 times.

J.P. Morgan and Barclays are acting as financial advisers to Windstream on the transaction, and Foros and Goldman Sachs & Co. are acting as financial advisers to EarthLink.

The combined company will retain the Windstream name and will be headquartered in Little Rock, Ark.

Closing is expected in the first half of 2017.

Loan

On Sept. 19, Windstream Services LLC upsized its term loan B-6 to $750 million from roughly $699 million, reduced pricing to Libor plus 400 basis points from Libor plus 425 bps and tightened the issue price on the term loan to par from 99.75.

The term loan still has a 0.75% Libor floor and 101 soft call protection for six months.

Proceeds will be used to refinance an existing term loan B-6, to pay down some notes, to pay down revolver borrowings and for other general corporate purposes.

Notes

On Sept. 7, subsidiary Windstream Services, LLC issued a notice of redemption for all $369,469,000 of its outstanding 7 7/8%% senior notes due 2017.

The notes were redeemed on Sept. 30 at par plus a make-whole premium plus accrued interest to the redemption date.

Windstream is a Little Rock, Ark.-based provider of communications and technology solutions.

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