That’s the question of the day in telecom after tiny Windstream Holdings said it plans to take advantage of the tax-cutting strategy. That sent its shares up 13.9% in mid-day trading, and boosted most other cable and telecom company stocks on a relatively flat day for the market.
Windstream took everybody by surprise this morning when it said that it will spin off its fiber optic and copper cable lines into a publicly traded real estate investment trust (REIT). The TV, broadband, and phone provider plans to pay $650M a year to lease the lines. What’s more, Windstream says it received a “favorable private letter ruling” from the Internal Revenue Service endorsing the gambit. That will enable the company to slash its debt by $3.2B, freeing cash for broadband upgrades, with a REIT that’s “positioned to provide an attractive dividend to shareholders and grow revenue through lease escalation, capital investment and acquisitions.” The Arkansas-based company had 421,100 digital TV customers and 1.2M broadband subscribers in March.
“To our knowledge, this is the first instance of telecommunications network assets being contributed to a REIT,” says MoffettNathanson Research’s Craig Moffett. Can others follow suit? Perhaps. Everyone in cable and telecom “will surely look closely at emulating Windstream because the tax savings are potentially so significant,” he says. Moffett’s back-of-the-envelope calculations show possible tax savings of $5.2B for AT&T, $4.2B for Verizon, $2.3B for Comcast (with Time Warner Cable), and $235M for Cablevision. But that would change if Congress jumps to plug what might be seen as a huge loophole in the tax laws. “It’s hard to envision bi-partisan action on ANY issue, let alone fixing the tax code. But closing a tax loophole that your phone or cable company is exploiting to avoid taxes may be the one. It’s hard to imagine that there wouldn’t be relatively broad populist anger.”
Wells Fargo Securities’ Marci Ryvicker says cable companies probably won’t act until they can glean answers to several questions about REITs and tax laws. Even so, “the fact that it appears to be possible from a legal perspective is a positive for the space in general.”