425: Uniti Group Reaffirms Confidence in Windstream Deal Despite Market Skepticism at TD Cowen Conference

Uniti Group's CEO, Kenny Gunderman, addresses market concerns about the Windstream deal at the TD Cowen conference, emphasizing the strategic rationale and long-term value creation despite the stock's negative reaction.

Summary

• Uniti Group's CEO, Kenny Gunderman, discussed the Windstream deal at the TD Cowen 52nd Annual Technology, Media & Telecom Conference, addressing the market's negative reaction and reaffirming the company's conviction in the deal's strategic benefits.
• Gunderman believes the market's reaction is due to technical pressures and the need for investors to fully understand the fundamentals of the deal.
• He highlighted the strategic rationale of combining Windstream's wholesale business with Uniti's wholesale fiber strategy, projecting mid-single-digit growth for this segment.
• The recombination of Kinetic (OpCo) and Uniti (PropCo) is expected to create a strong fiber-to-the-home and copper-to-fiber conversion story, targeting Tier 2 and Tier 3 markets.
• The combined business is projected to grow at a low to mid-single-digit rate, with EBITDA margins leveling out in the mid-40% range and capital intensity between 15% and 20%.
• The timing of the deal is driven by Uniti's improved balance sheet, the BEAD program opportunity, and the anticipation of a fiber consolidation wave in the next 18 to 24 months.
• The deal's structure aims to set up the balance sheet for success, align interests with selling shareholders, and minimize dilution to Uniti's shareholders.
• Gunderman believes the combined entity is currently undervalued at approximately 6x EBITDA and should be valued at 8x to 10x.
• Key initiatives to improve the stock's performance include providing investors with information and access, executing the integration plan, refining build plans, and showing progress on a strategic review of assets.
• Leverage is expected to be high initially, around 4.8x before preferred equity and over 5x during the build phase, but is projected to decrease to 4.5x as cash flow improves in 2026 and 2027.
• The deal is expected to generate $100 million in OpEx synergies, primarily from bringing Windstream's off-net traffic onto Uniti's network.
• Uniti plans to de-REIT, saving on corporate taxes due to the asset step-up, while potentially retaining REIT status at a subsidiary level for strategic flexibility.
• Uniti is open to participating in the anticipated M&A wave, potentially exploring options with companies like Crown Castle.
• The demand for fiber is driven by AI, with hyperscalers seeking data center capacity in Tier 2 and Tier 3 markets, leading to increased sales of Wave, dark fiber, and new fiber builds.
• The company expects a large bookings quarter driven by selling existing capacity to hyperscalers, with some customers planning for the next 6-12 months and others for the longer term.
• The company declared a dividend, and that should be their last cash distribution because with that dividend, they'll be over-distributed for 2024 from a cash flow perspective.
• The deal should close in 2025.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While the market reacted negatively to the deal, management expresses strong confidence in the strategic rationale and long-term value creation. The discussion includes both challenges and opportunities, resulting in a balanced outlook.

Positives

• The Windstream deal is expected to create a unique fiber-to-the-home and copper-to-fiber conversion story.
• The combined business is projected to grow at a low to mid-single-digit rate, with stable EBITDA margins and capital intensity.
• The deal is expected to generate $100 million in OpEx synergies.
• Uniti is positioning itself to participate in a potential M&A wave in the fiber industry.
• The company is experiencing increased demand for fiber driven by AI, leading to new sales opportunities.
• The company declared a dividend, and that should be their last cash distribution because with that dividend, they'll be over-distributed for 2024 from a cash flow perspective.
• The deal should close in 2025.

Negatives

• The market reacted negatively to the Windstream deal, causing a significant drop in Uniti's stock price.
• Leverage is expected to be high initially, which could be a concern for some investors.
• The company will need to execute its integration plan and refine its build plans to realize the full benefits of the deal.
• The company will de-REIT which may have tax implications.

Risks

• The company may not be able to achieve the projected synergies and growth rates.
• The integration of Windstream and Uniti could face challenges.
• The company may not be able to successfully participate in the anticipated M&A wave.
• The demand for fiber driven by AI may not be as strong as expected.
• Regulatory approvals may be delayed or not received.
• The company will de-REIT which may have tax implications.

Future Outlook

The company anticipates a fiber consolidation wave and aims to participate in it. They expect increased demand for fiber driven by AI and plan to expand their fiber build plans. The company expects a large bookings quarter driven by selling existing capacity to hyperscalers.

Management Comments

• We're still convinced this is absolutely the right deal and the right time to do it.
• I think what we're hearing is, I think, universal support for the recombination, just a lot of questions about the mechanics and the underlying fundamentals.
• We really think that this business today on a pro forma basis given where the stock trades is basically valued at 6x, which we think is really, really ridiculously low. We think it's worth 8, 9, 10x.
• My view is we're going to be able to get a premium multiple on that fiber revenue, whether it be fiber-to-the-home or commercial versus the MLA revenue.
• Part of the rationale for the combination now is to put ourselves in a position to participate in what we think is an M&A or fiber consolidation wave that's ongoing and coming.

Industry Context

The announcement comes amid increasing interest in fiber assets, driven by the growth of fiber-to-the-home and the demand for data center connectivity. The industry is anticipating a wave of consolidation, with infrastructure funds looking for exits and strategic players seeking scale. The AI boom is further fueling demand for fiber infrastructure.

Comparison to Industry Standards

• The CEO mentions ABS financings in the fiber-to-the-home space are getting 9.5x to 10x leverage.
• Private market valuations for fiber businesses are still seeing 10x to 20x multiples.
• T-Mobile recently made a large investment in Lumos, an incumbent fiber-to-the-home provider, indicating the value strategic parties place on scaled fiber assets.

Stakeholder Impact

• Shareholders will be impacted by the potential dilution and the long-term value creation of the deal.
• Employees of Uniti and Windstream will be affected by the integration and potential synergies.
• Customers will benefit from the combined company's expanded fiber network and service offerings.

Next Steps

• File the proxy statement in a couple of months.
• Continue to execute at Uniti and Kinetic.
• Put in place and execute an integration plan.
• Refine the expanded build plans.
• Continue a strategic review of the assets.
• Show progress and execution to the market.

Key Dates