Windstream and Earthlink Merge
- By Holmes Osborne, CFA
Windstream Holdings (WIN) just inked a deal to merge with Earthlink (ELNK). Both companies have seen sales and earnings decline over the last few years in the competitive telecom and Internet data industry.
First I will talk a little about Windstream. There are 92.26 million shares, the stock trades at $7.32, and the market cap is $675 million. Trailing 12 months earnings per share is a loss of $1.04. The dividend is 60 cents, and the dividend yield is 8.2%. Now that's enticing.
Warning! GuruFocus has detected 6 Warning Signs with WIN. Click here to check it out.
The intrinsic value of WIN
Revenues have been falling a few hundred million a year for the last four years and are now at $5.5 billion (trailing 12 months). Management has done a good job keeping costs in line with falling sales. EBITDA is $2 billion for the last 12 months; that's promising.
The balance sheet shows $42 million in cash and $629 million in receivables. This is to $342 million in accounts payable and $4.732 billion in long-term debt. A little debt heavy but I've seen worse when it comes to telecom. Free cash flow was a loss of $172 million for the last 12 months and a loss of $29 million in 2015. What is impressive is that between 2011 and 2014, free cash flow ranged from about $500 million to $700 million. Wow!
According to the Wall Street Journal, Windstream will offer 93 million shares in a deal that is worth $1.1 billion in total debt. Windstream holders will have 51% of the combined entity and Earthlink holders 49%. In the latest quarter, Earthlink's sales slipped 13% to $270.9 million.
Friday, Earthlink's stock closed at $5.32. Today, it is $5.39. The market does not seem enthused. Earthlink's balance sheet shows $76.8 million in cash and $72.8 million in receivables. This is to $95.9 million in payables and $437.5 million in debt. A little heavy on the debt side for the erstwhile Internet leader.
According to a company presentation, Earthlink has 29,000 miles of router that will expand Windstream's by 16,000. There is a $125 million cost reduction estimation. The dividend will remain at 60 cents.
So the markets are not too excited about the tie-up. Neither am I. I must mention that Earthlink's stock was almost $50 a share in 1999. How things change. I'm not a telecom/tech person so I can't see the long-term benefits. Such a super competitive industry. I do like the dividend, though.
Disclosure: We do not own stock.
Start a free seven-day trial of Premium Membership to GuruFocus.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 6 Warning Signs with WIN. Click here to check it out.
The intrinsic value of WIN
