In a deal that came as a complete shock to me, Windstream (NYSE:WIN, news, filings) has agreed to purchase PAETEC (news, filings) in a deal worth $2.3B. Windstream will assume or refinance PAETEC’s net debt of $1.4B and PAETEC shareholders will receive 0.460 shares of Windstream common stock for each PAETEC share they own. That appears to peg the deal at about $5.61 per share based on Friday’s close, and if one guesses PAETEC’s current run-rate EBITDA at about $380M, the EV/EBITDA multiple of the deal would be in the neighborhood of 6. Or, it could be Monday and my calculator hasn’t woken up yet, we’ll see.
When complete, Windstream will have become a national CLEC. It had been moving in this direction for years with the purchases of Nuvox and KDL, but until now those revenues had been relatively small next to the ILEC business. PAETEC, however, has revenues now of about $2B annually, following the purchases of Cavalier late last year and XETA this spring. And if you go further back, there are a plethora more deals that have brought quite a roll up of CLEC-type assets into Windstream’s camp. Add all of them up and the CLEC business will contribute as much as 70% of Windstream’s $6B in run-rate annual revenue. The company’s enterprise business overall will clearly be their primary focus from here on out, and they obviously haven’t run into any big problems being both an ILEC and a CLEC thus far.
The fiber assets are quite complimentary, as the KDL assets fit right in the middle of the Intellifiber assets on the east coast and in the rust belt and plus the former McLeodUSA fiber further out in the Midwest, while reaching southward toward the Gulf Coast. I had not thought PAETEC was ready to sell out. It seemed far more likely that they would eventually make a move on some western fiber. However, in combination with Windstream they do appear to fit quite well.
Windstream is also likely looking at PAETEC’s early move on the cloud and its datacenter footprint, which would seem to fit well with the Hosted Solutions acquisition of last fall. Windstream expects to derive $100M in annual operating cost synergies as well as tax benefits derived presumably from NOLs with a net present value of $250M.