Shares of Windstream Holdings were up more than 22% after the company announced plans to spin-off some telecommunications into a real estate investment trust, or REIT.
The company also announced that it has received a private letter ruling from the IRS, “relating to certain tax matters regarding the tax-free nature of the spinoff and the qualification of the spunoff entity’s assets as real property for REIT purposes.”
A real estate investment trust invests in real estate and trades on a public exchange, like a stock, and generates income through rent collection and investment in additional properties or mortgages.
REITs typically pay a considerable dividend, as REITs are required to pay out at least 90% of their taxable income in the form of dividends.
Windstream said the REIT will own the company’s existing fibre and copper network and other fixed real estate assets. The tax-free spin-off will also lower the company’s debt by $US3.2 billion and increase cash flow.
The deal, which is being cheered by Windstream investors, could also serve as a blueprint for other companies in the telecommunication space.
In a note to clients following the announcement, Oppenheimer analyst Timothy Horan said the announcement is “very positive” for the entire ecosystem of communication infrastructure companies, notably CenturyLink and Frontier.
Horan added that though there are high regulatory barriers to clear, this deal will be a “game changer” for the value of non-REIT infrastructure stocks, which Horan said are now, “20% or so undervalued across the board.”
Horan noted that the REIT structure should allow Windstream to avoid $US200 million per year in potential tax payments.
On Twitter,CNBC’s David Faber said that in addition to CenturyLink and Frontier Communications, Windstream’s deal could pave the way for Verizon, AT&T, and Comcast to do the same with their network assets.
Following the news, CenturyLink shares were up nearly 8% while shares of Frontier Communications were higher by more than 15%.
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