Q1 2024 Uniti Group Inc Earnings Call and M&A Call
Yeah.
Good morning, and welcome to today's conference call to discuss the unity owned Windstream merger announcement and unit first quarter 'twenty 'twenty four earnings results. My name is Michelle and I'll be your operator for today today's call is being recorded and a webcast will be available on the company's investor relation.
Since website investor Dot unity Dot com, beginning today and will remain available for 365 days at this time all participants are in a listen only mode participants on the call will have the opportunity to ask questions. Following the company's prepared comments.
It is now my pleasure to introduce Bill just totally Ao units Vice President.
Vice President of Investor Relations and Treasury. Please began.
Vice President of Investor Relations and Treasury. Please began.
Good morning, everyone and thank you for joining today's conference call to discuss the merger between Uniti and Windstream as well as the entities first quarter 2024 results.
Speaking on the call today will be Kenny gunderman, our CEO and Paul in Burlington.
Speaker Change: Uh huh.
Broad numbers reference on today's call refer to the Uniti and Windstream merger Investor presentation.
Before we get started I would like to quickly cover our safe Harbor.
Note that today's remarks may contain forward looking statements. These statements include but are not limited to statements about the benefits of the proposed transaction between Uniti and Windstream.
Speaker Change: <unk> future financial and operating results.
Is it related to the expected timing of the completion of the transaction and combined company plan and other statements that are not historical facts.
Speaker Change: Forward looking statements contained in today's discussion the materials speak only as of the particular date or dates indicated in the materials.
Uniti does not undertake any obligation to update or revise any of this information whether as a result of new information future events or otherwise.
Speaker Change: Numerous factors could cause actual results to differ materially from those described in the forward looking statements.
For more information on those factors. Please see the section titled forward looking statements in the presentation and the risk factors section of the proxy statement that we will file in due course with the SEC.
Please also note that Windstream will file a form S. Four registration statement with the SEC that includes a proxy statement and prospectus regarding the transaction and investors are urged to read the proxy statement and prospectus when it becomes available because it will contain important information about the transaction.
In addition, you're needing western and their directors and officers maybe deemed to be participating in the solicitation of proxies in favor of the transaction.
You may find information about Uniti directors and executive officers in the company's most recent proxy statement you may obtain a copy of the merger proxy statement and prospectus when it becomes available through the SEC website, uniti and windstream as websites or by requesting a copy from either company's investor Relations website.
More information on how to request. These documents is available in the investor presentation that accompanies this call.
With that I would now like to turn the call over to Kelly.
Thanks, Bill good morning, everyone and thank you for joining.
We're excited to announce that we've signed a definitive agreement to Gabon unity and Windstream and what we believe will be a transformative transaction for both unity and the digital infrastructure industry.
On today's call, Paul and I will walk you through the details and strategic rationale for the transaction before turning to Q&A.
Starting on slide five of the merger presentation. The combination of Uniti and Windstream will create a premier insurgent fiber provider in the United States, serving more than $1 1 million customers with a particularly strong presence in the Midwest and southeast.
There's no other company in our industry. Besides the entity that will have the mission critical fiber reach especially in less competitive tier two and three markets positioning us for growth well into the future.
With an enhanced balance sheet and free cash flow profile will accelerate fiber to the home deployments with the option to expand builds by up to a million additional households.
Importantly, the combination will also remove several dis synergies that exists in the current landlord tenant structure.
Aligning the two companies' capital allocation objectives.
Additional value creation opportunities will result from meaningful annual synergies and greatly enhanced strategic optionality.
Turning to slide six.
Under the terms of the agreement Uniti shareholders will receive approximately 62% of the outstanding common equity of the combined company.
Windstream shareholders will receive $425 million of cash $575 million of preferred equity and common shares representing approximately 38% of the outstanding common.
Certain of <unk> largest shareholders, including Elliot, which is also a current holder immunities equity and that will be rolling substantially all of their investment value in windstream into the combined company.
The implied valuation we're paying for Windstream using are not affected share price from February 16th the price prior to press reports on a rumor transaction.
And an attractive five three times EBITDA multiple and $4 seven multiple on a synergy adjusted basis.
Upon closing both company's debt silos will initially remain in place and the combined company will become a taxable C Corporation.
Speaker Change: So your entity will no longer maintain corporate REIT status. Following the closing of the transaction. The REIT structure has served unity well historically.
And as we said before it is many.
Had many financial and strategic benefits.
For example, with this transaction <unk> REIT status has permitted us to structure. This merger in a way that is intended to achieve a substantial tax basis step up.
Although we don't expect to maintain corporate REIT status. Upon closing the combined company will not be taxed as a REIT, we may restructure certain of our subsidiaries to qualify as rates, thus potentially providing additional tax savings while preserving strategic optionality.
The combined company will retain the entity name with our corporate headquarters remaining in little rock.
I will continue as CEO of the combined organization and Paul Boling time will tell.
In his role as CFO.
Speaker Change: We're also pleased that certain key members of Windstream management management team will remain with the combined company.
Speaker Change: In fact drew Smith Windstream <unk> CFO.
With us today to participate in Q&A.
Drew will also be participating with us in various upcoming investor conferences.
The new combined company will be well supported by a deep bench of commercial and residential fiber expert.
Expertise from both companies.
So five person Unity board will remain in place and Elliott will have the right to select two new board members to.
Speaker Change: Two additional new board members will be jointly selected by unity and Elliot, resulting in a new non person board.
Including the dividend we declared yesterday.
We will have distributed dividends totaling <unk> 45 per share for the 2020 for tax year, which is more than our current estimated minimum required distribution.
As a result, and given that the new business will have substantial value accretive internal uses for our capital will be suspending our common dividend going forward.
Speaker Change: However, we will consider reinstating a common dividend in the future as appropriate.
Speaker Change: Please turn to slide seven.
We believe that having an owned scaled fiber network has material competitive and financial advantages.
This is particularly true when you are a first mover into tier two and three markets by building and operating fiber with a true insurgent and go to market approach.
We've proven this consistently with our predictable mid single digit growth in our uniti fiber and leasing businesses over the past few years.
Speaker Change: By combining our fully owned 57000 route mile kinetic network with the kinetic opco business targeting $4 3 million households, we're now expanding the successful strategy into the into fiber to the home.
Importantly, we expect that the combined companies' current operating plan will be fully funded and then we will have the ability to expand the fiber to the home build by up to 1 million additional households, and our existing markets.
Windstream is wholesale fiber business fits very strategically with uniti leasing and Uniti fiber.
With a combined 217000 fiber route miles network the.
The business will be a leader in both reach and technology.
While offering unique routes that differentiate us from competitors.
Our southeastern focused Uniti fiber business will also have a greater growth potential given the more expansive coverage that the windstream field resources will bring to bear.
I'll talk more later about the managed services business.
Business known as Windstream enterprise Bye.
But while it is not core to our fiber infrastructure strategy. There are many value accretive options that we intend to pursue with that business.
Turning to slide eight.
Before going deeper into the business, let's zoom out for a moment and talk about why unity is doubling down on fiber.
We've been saying for some time that fiber is the mission critical asset in communications infrastructure acting as good acting as the connective tissue for all current and future broadband delivery.
There are currently more use cases for fiber than ever before driving bandwidth usage exponentially higher.
Today and in the future fiber to the home will be one of the most robust use cases and this transaction will bank unity of direct immaterial player in this space.
The digital transformation era of the last several years was the first time high bandwidth consuming applications and uses we're available on a broad scale to both consumers and businesses.
Said differently millions of users were finally armed with connections that could deliver one gig speeds driving enormous amounts of traffic onto fiber networks.
Importantly, the digital transformation era. It was also the first time that broadband was truly reveal to be a mission critical asset.
During the pandemic had it not been for things like remote work telemedicine and the ability to stay virtually connected socially our society simply would not have functioned.
Looking ahead to the next few years as we now enter the generative AI era. All of these trends will be compounded with the advent of things like autonomous vehicles robotics, the meta versus many others.
Slide nine showcases the reach of our insurgent fiber networks extending into unique and highly defensible areas a strategic advantage that positions unity to meet the surging demand for high speed broadband <unk>.
Including connected buildings fiber to the tower and small cell connections connected pops in data centers and the $4 3 million total homes within kinetics current footprint Uniti will have the potential to reach over 5 million connected on ramps each driving increasing amounts of bandwidth onto our own wholesale network.
Despite these millions of connections.
We're agnostic as to which use cases are ultimately the winners because it is a national wholesale provider, we benefit even if we don't own the last mile connection.
Speaker Change: Turning to slide 10.
For those of you who aren't as familiar with kinetic I'd like to explain why it is such a unique fiber to the home platform that we're excited to own outright.
So our shareholders can benefit from the tremendous upside potential.
First fiber to home is indisputably, a superior product from a latency and reliability perspective.
We will be for our lifetimes and beyond.
Speaker Change: Secondly, we believe after having reviewed many fiber to the home business models over the years, including over builders open access and others incumbent providers have a big advantage when providing fiber to the home.
Specifically incumbents have an embedded network benefiting from years of investment that allows for a faster fiber deployment at lower costs and Ironically and comments are now share takers with fiber to the home after many years of playing defense against wireless and cable.
The key to unencumbered success going forward is shedding old brands in the utility mentality and replacing that with a true insurgent go to market approach with a focus on quality and customer service both of which are core to uniti success at the current share taker in enterprise and wholesale and kinetics in residential.
Thirdly kinetics footprint is diverse and spread across 18 states with over 50% of those households, located in the South east.
We believe the southeast is a terrific place to invest from our competitive and demographic point of view as evidenced by our success at Uniti fiber.
Just as importantly, 75% of kinetics footprint has 20000 or fewer households <unk>.
Reinforcing another core tenet of Uniti is focus on tier two and three markets.
Next kinetic is also building fiber passing them at what we believe to be an industry, leading cost of approximately 650 per passing.
Speaker Change: It is important to dwell on this for a moment.
Prior to starting its fiber to the home expansion with entities GCI program in 2019 kinetic invested close to $500 million building fiber to the D slab.
This investment not only provided kinetic the ability to provide a highly competitive DSL product with 100, Meg speeds to over 40% of households.
Speaker Change: It has also given kinetic a head start or a jumping off point to build distribution fiber and drops as part of the final fiber to the home build.
Speaker Change: This investment not only highlights the cost and time to deploy benefits of kinetic but it's also a good reminder of another strategic advantage of bringing together the two companies.
Uniti will not only own the fiber to the home connections, but also the middle mile and ultimately the backhaul network.
Having a fully owned and operated network will not only provide superior customer service, but will also help us competitively.
As we've highlighted the past few quarters some of our largest wholesale customers recently have been fiber to the home providers spending substantial dollars procuring backhaul.
Kinetic will be able to avoid substantial backhaul costs.
Which we believe equate to roughly 20% of the total cost of building fiber to the home for others.
Only in the backhaul network will also be a tool to disincentivize over builders.
From entering our markets has in many cases, our backhaul market is the only one available.
This helps segue into the final point to highlight on kinetic.
Speaker Change: Only 15% of the footprint today has a true over builder and that has held relatively constant for the last five years.
We certainly don't expect this number to grow in the future given we're increasing our presence in offensive posture on a combined basis.
If you pick the right markets build fiber first you can enjoy the benefits of favorable competitive dynamics for many years to come.
Moving to slide 11, you can see the numbers behind why kinetics fiber to the home business has such significant upside potential.
Connecticut has been demonstrating strong success of the past few years.
Initial penetration levels on early cohorts have consistently averaged between 15 and 18% in the first year increasing to above 25% on average by the second year.
Recent cohorts have been demonstrating initial penetration rates of up to almost 30% is kinetic has really ramped up a more customer focused digitally enhanced local go to market strategy.
As I said earlier and as Connecticut is beginning to demonstrate an insurgent mentality really matters and can move the needle on penetration and churn.
The predictable results from initial market builds in subsequent penetration levels are right in line with the entities anchor lease up economics.
And another reason why we're excited to be entering this space.
Kinetic is currently targeting building fiber to 1.1 dollars 9 million homes by 2027.
Which would result in over 40% of the footprint being overbuilt with fiber.
Given the very rural nature of this footprint.
Cheating over 40% coverage with a disciplined and profitable model and kinetic will be a significant achievement.
With that said, we believe on a combined basis unity and kinetic can expand this build by up to a million additional households, achieving fiber coverage of over 60%.
There are a number of reasons for this.
Speaker Change: But it's primarily driven by having true owners economics, especially being on the precipice of the bead program launching.
Speaker Change: Over the next 12 months, we will spend more time refining the Newbuild plan.
And we will report more on that as clothing approaches.
Slide 12 highlights at another exciting aspect of this transaction is combining our uniti leasing business with Windstream wholesale business.
The backhaul network I mentioned earlier that will be important to kinetics success has terrific shared infrastructure potential.
There is an excellent growth opportunity in national wholesale fueled by the use cases, I referenced earlier, including and especially generative AI.
Today energy sales, mostly dark fiber and we are beginning to like more and more inner city routes to become a player in the growing waste market.
Windstream wholesale is already a meaningful share taker in the waste market and as a national network that is highly complementary to <unk> existing network.
Thus on a combined basis this transaction accelerates our national wholesale strategy by approximately four years.
And it also enhances our relationships with the increasingly important hyperscale.
Uniti is consolidated bookings during the first quarter were $6 million of MRI.
However, not included in our bookings number as the dark fiber lease revenue from two large deals that closed in the first quarter with one of our hyperscale customers.
These deals represent approximately $20 million in total contract value and will greatly expand our network in one of our key metro markets in the southeast providing entity with substantial network substantial new network assets. It can lease up to other customers.
Speaker Change: These 20 year contracts include approximately $16 million of upfront lease revenue.
But under GAAP accounting rules will be recognized upfront at the time of delivery, which.
Which is likely late 2025 early 2026.
As a result, there were substantial new sales in the quarter that are not reflected in our bookings number.
Going forward, we plan to specifically call out deals of this nature that largely get excluded from our traditional bookings metric as the hyperscale or in particular, often desire to structure their transactions in this fashion for their internal purposes.
To be clear the underlying attractive shared infrastructure economics to your entity are no different than a traditional booking.
Speaker Change: As I foreshadowed on our last earnings call, we've seen multiple sizable new contract wins from Hyperscale or <unk>, including the one I just covered.
Some of those wins have continued into the second quarter.
As a result consolidated bookings for April are shaping up to be one of the largest month on record for unity with close to 500 K of MRI expected in April alone.
Going forward that to the <unk>.
The company will have many distinct tier two and three inner city routes, which we think will be particularly appealing to the hyperscale.
Speaker Change: This consistent strategy of building and lighting fiber on tier two three tier two and three routes and in tier two and three markets across wholesale enterprise and now residential positions unity as a share taker for years to come.
With that I'll now turn the call over to Paul.
Speaker Change: Thank you Kenny.
I'll start with some commentary on unity is go forward business post combination and then briefly review <unk> updated 2020 for guidance.
Paul: Turning to slide 14.
This combination is attractive for a number of reasons, most notably because it creates a true fiber powerhouse with unmatched fiber assets that are poised to deliver long term returns and unlock significant value for shareholders. Upon closing this transaction, we will retain the unity name and expect to report our business segments as kinetic fiber.
Infrastructure and managed services.
Paul: Our fiber to the home platform will continue to be branded as kinetic.
Fiber infrastructure will include our current Uniti fiber and Uniti leasing segments, along with the Windstream wholesale segment, all of which are highly complementary and will combine to create a premier fiber infrastructure company with both national and deep regional capabilities as well as a fiber network that is predominantly wholly owned and operated and <unk>.
Fact over 95% of kinetic and fiber infrastructure generated revenue will be on owned network and almost 40% of combined revenue will be derived from highly predictable fiber to the home and wholesale customers importantly, only a small fraction of our combined revenue will be legacy in nature.
Paul: While the recombination of the kinetic business will garner more attention the reunification of the Windstream wholesale business with <unk> National fiber network will be powerful in and of itself, eliminating a number of operational and strategic inefficiencies and creating a predominantly on net national fiber infrastructure company, particularly when combined with the <unk>.
Fiber deep regional fiber business.
Turning to slide 15.
The combination will also serve to strengthen our balance sheet for starters. It will remove the overhang and uncertainty of the master lease renewals surrounding both companies.
Paul: Closing the current capital structures from each company will initially remain intact and will be siloed under one new corporate umbrella. This structure will allow us to preserve the current capital stack of both companies much of which is fixed at attractive rates with distant maturities and greatly simplifies the path to a combination.
As Kenny mentioned Windstream shareholders will be receiving $425 million of cash at closing Uniti expects to fund that cash consideration from operations revolver borrowings and our future capital market transactions between sign and close.
To that end Uniti has entered into a bridge funding commitment with certain banks in the amount of $300 million.
Beyond this $300 million commitment Uniti may look to further access the capital markets prior to closing on an opportunistic basis to further strengthen our position for instance, our recently announced ABS financing plan may provide the opportunity to expand beyond the current $350 million ABS loan commitment.
Paul: Net leverage for the combined company as a prior year end was four eight times, including the incremental $425 million of cash consideration at closing.
Although leverage may tick up above this level as we complete the bulk of our fiber to the home build we expect that our long term leverage target will be between four and four five times.
Once the current Senate kinetic fiber to the home investment plan, one winds down by around 2027, we expect the positive free cash flow profile of the combined business will be conducive to the goal of reducing total leverage.
Slide 16 provides an overview of the synergy opportunity, which will further enhance cash flows and returns to shareholders.
Opex synergies are expected to ramp to up to a $100 million annually within the first three years.
Most of these synergies will come from corporate functions.
Software and systems and from off net expense reduction in the fiber infrastructure business.
In addition, we are expecting annual capex synergies of 20 million to $30 million per year.
We believe this combination will also allow us to realize significant incremental upside from things like enhanced sales the acceleration of Uniti fiber's metro growth opportunity and cost of capital improvements, while we believe in our ability to realize these incremental benefits. We have not included them in our accretion calculations.
Turning now to <unk> updated 2020 for outlook.
We are revising our guidance for business unit level revisions and the impact of transaction related and other costs incurred to date, our outlook excludes the impact from the expected merger with Windstream future acquisitions capital market transactions and future transaction related and other costs, not specifically mentioned herein.
Actual results could differ materially from these forward looking statements.
Our 2020 for outlook for consolidated revenue and adjusted EBITDA remains unchanged.
However, we are slightly increasing our uniti leasing revenue and EBITDA to reflect higher than expected lease up activity, primarily driven by the increased hyperscale activity.
Been seeing while slightly lowering our uniti fiber revenue and adjusted EBITDA estimate due to the timing of enterprise sales.
We are also slightly lowering our <unk> estimate for the full year 2024, primarily due to higher interest expense.
Paul: At Uniti leasing, we still expect to deploy $260 million of success based capex at the midpoint of our guidance of which $230 million relates to Windstream GCI investments that will predominantly be weighted in the first half of 2024 versus the second half.
Net success based Capex for Uniti fiber. This year is still expected to be $105 million at the midpoint of our guidance and 11% decrease from levels in 2023 and represents a capital intensity of 36% down from 40% in 2023.
We expect full year <unk> to range between $1 36 and.
And a $1 43 per diluted common share with a midpoint of $1 40 per diluted share.
We expect our weighted average diluted common shares outstanding for the full year 2024 to be around 285 million shares as a reminder guidance ranges for key components of our outlook are included in the appendix to our earnings presentation.
At quarter end, we had approximately $470 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity, our leverage ratio at quarter end was 607 times based on net debt to first quarter 2024 annualized adjusted EBITDA, excluding the debt and adjusted EBITDA.
Impact from the ABS loan facility.
Second our board declared a dividend of <unk> 15 per share to stockholders of record on June 14th payable June 28.
With that I'll now turn the call back over to Kenny.
Thanks, Paul Slide 17 highlights the exciting strategic options this combination unlocks.
As I've already discussed Uniti will prioritize expanding the fiber to the home build and continue investing in our uniti fiber and leasing businesses as we have historically.
We will also be very focused in the near term on executing on our integration plan and realizing our synergy goals.
In addition, owners' economics are vitally important in the fiber business and excluding the managed services business over 90% of unity will be on owned infrastructure driving greater efficiencies that are not fully reflected in the synergy numbers.
We also believe that there are opportunities to expand the ABS program using kinetic assets and we expect that to be an even more significant value accretive tool to fund our business.
Paul: Lastly, M&A has always been an important tool for unity to realize shareholder value and we fully expect to be active in the future.
Given the more simplified structure going forward, we believe the options available for the combined company will be substantially greater than in the past in a number of respects, including possible divestitures of noncore assets and separation of the businesses.
With that let me end by reiterating our excitement about this fantastic combination and the future prospects for Uniti.
This combination will create a premier insurgent fiber provider in the U S with a scaled platform for growth and a differentiated position in tier two and three markets.
Paul: Our enhanced balance sheet and cash flow generation will support growth.
Increasing our ability to expand fiber to the home build outs.
Looking ahead, the combination will also deliver additional value accretive opportunities through meaningful synergies and M&A optionality.
Speaker Change: With that we'd be happy to take your questions.
Speaker Change: Thank you to ask a question. Please press star one on your telephone and to withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.
The first question comes from David Barden with Bank of America. Your line is now open.
Hey, guys.
So much for taking the question and congrats on the transaction Kenny.
Speaker Change: Andrew.
David William Barden: I guess first thing I have to say would be that.
David William Barden: Rumor has it windstream reported results yesterday.
David William Barden: They were apparently good.
But people like me don't know that because we don't have access to those financials.
David William Barden: What's going to be happening. This morning is that Theres a universe of people that know what Windstream reported yesterday that will be trading uniti stock today and there is a universe of people that don't know.
Ported yesterday that are going to be on the other side of those trades. So I.
I guess the first thing would be I think it's important that if this is going to go ahead, we need to have full access to those financials immediately.
That kind of be.
Speaker Change: Edited version that we get a few weeks after went through report so that that's something you guys can deliver.
Yes.
Hey, David Good morning.
Yes, we're planning to be more <unk>.
Transparent and provide more information than we have on a go forward basis.
We certainly recognize the importance of that it's always been important but it's more important now.
In fact, that's one of the reasons why we have drew here with US this morning to reinforce that point.
And we'll be together and investor conferences on a go forward basis. So we fully.
Speaker Change: To be able to give investors the information that they want some will want more than others.
We'll adjust along the way, but that's absolutely our intention.
Okay, great well, thank you Kenny.
Speaker Change: So Jim just my next question was just.
A lot of the conversation about what the pro forma deleveraging is going to be plenty of time that seems to include the $4 25 of new issuance.
Speaker Change: But it doesn't include the $5 75 with the preferreds.
It does include the $100 million of the.
Speaker Change: Synergies, but those arent going to show up until a year. After the close which is a year from now so what would the leverage be per person investing uniti today on a pro forma basis.
<unk> included the equity raise the preferreds, but excluded the.
$100 billion in synergies what would that look like right now.
Speaker Change: Yes, Dave this is Paul.
I'll take that.
The numbers that we have we have put out.
Like you said you do reflect 2023 pro forma leverage of a four eight times and that does.
Paul: Take into full effect, the $425 million of cash required a closing so I think you said that accurately.
We do expect.
Paul: Leverage to tick up.
The preferred the preferred instrument, we expect to have equity treatment. So it won't be included in our leverage calculations.
Paul: Going forward.
So we haven't included that in any.
Paul: And any of our pro forma pro forma numbers, but we would expect leverage to tick up above that four eight times a bit as we complete the fiber to the home build.
Through 2027, but beyond.
Beyond that fiber build cash flow becomes positive.
And highly accretive over time, and we think thats very conducive to managing down to a target leverage debts between four and four five times, which we think is more appropriate level to manage the business on a longer term basis.
Got it and so and then sorry, just two quick clarification. So in order for those preferreds instruments to be known that there would be kind of a convertible preferred instruments with a less than three years.
Maturity is that fair Bill.
Well they are convertible.
<unk>.
Bill: Well they are redeemable.
At any time, but by the issuer in cash or in stock. So that's a key component of those and then Theres a put option.
That holders of those does notes will have.
Beyond.
Certain time out into the future beyond the 10 year timeframe, so and those would also be.
In stock or in cash.
At <unk> discretion. So those are certainly key components of.
Bill: The equity treatment.
We expect equity treatment I think we still have to run that through its paces, but we expected to receive equity treatment going forward.
Speaker Change: Got it got it okay. Thank you guys for the comments and congrats again.
One moment for the next question.
Speaker Change: The next question comes from Greg Williams with TD Cowen Your line is open.
Gregory Bradford Williams: Great. Thanks for taking my questions and congrats on the deal.
There's been talk of this merger for the past year and a half.
And just wondering whats changed.
Can you get the deal done now and move forward.
And then the second question is Kenny you mentioned a couple of times that you can restructure certain portions of the deal.
<unk> become a C Corp. Now so is there an idea that you could spin off the long haul and enterprise fiber business.
And make that a REIT.
I'm thinking assuming crown sells for a solid multiple on their fiber business getting a good value marker.
It's been that up or with the synergy between fiber to the home and enterprise fiber be btu good for for such as spin off thanks.
Speaker Change: Hey, Gregg Thanks for your comments and questions.
Speaker Change: Yes to your first question about why now I think.
Look we.
We've been in almost perpetual strategic evaluation mode since 2020.
But for a large portion of that time I would say unity was mostly reactive too.
D as in concepts and transactions.
Speaker Change: Primarily because we were really focused on liquidity in the balance sheet, and we were pretty transparent about that to the market.
Speaker Change: But starting around mid year last year, when we got a lot of our financing work behind us and we cleared the runway and had a multi year.
Period, with no maturities and ample liquidity, we really pivoted to being much more proactive.
On M&A.
And I think we message that pretty transparently at the time frankly.
Speaker Change: And we concluded that this is the deal we wanted to do we've looked at a lot of options.
We thought for some time that the industrial logic of combining our fiber business with Windstream wholesale is is very very sound. I mean, that's just that's just an acceleration of our of our often stated wholesale strategy. So it's a great fit.
And we also concluded that if we could find a good reasonable entry point from a valuation point of view to recombine.
The kinetic opco and propco that that would be a terrific way to give our shareholders the upside potential in that combination.
We'd bet, we'd looked at many options.
Where others.
Ride to affect that combination.
But ultimately from our perspective, the industrial logic of Recombining. Those two is very sound as well we've also messaged that.
Speaker Change: And we just concluded that trying to capture that upside potential on behalf of our shareholders was the right thing to do.
And the fact that we're all here today talking about this suggests that windstream shareholders agreed.
Ever we whenever we initiated conversations.
In the second half of last year.
We obviously were able to get good traction and by an alignment of interests and here we are today.
With respect to your second question around the REIT status.
I think you're onto the right theme, Greg So, yes, we're de reading at the corporate structure.
Radically I think thats going to save us more taxes than if we tried to preserve the REIT status at the corporate structure, because we're getting the step up and Theres also probably going to be some other corporate tax savings. So so we're going to be largely eliminating corporate taxes on a go forward basis without the corporate REIT structure, but there is.
Also some benefits to preserving the REIT status.
Speaker Change: Some of the subsidiary levels, if we can and we think we can but there's still work to be done there and one of those benefits is the strategic optionality when we've talked about the REIT status historically, we've talked about the benefits of.
Tax savings and other things, but we also talked about the strategic benefits of that REIT status is a fiber company in particular, because it is hard to get reached status and particularly hard for fiber companies.
So if you if you fast forward to a world where.
Where it did make sense to potentially separate the businesses that is something that that we would want to have as an option.
And look Greg I think there is there are a lot of synergies on combining the.
The wholesale middle mile Transport network with kinetic for the reasons, we talked about.
Speaker Change: I think those are very tangible.
<unk> from both a financial point of view and a competitive point of view, but at the same time I think one of the real benefits of this transaction is the strategic Optionality that the combined company has versus versus the two companies on a separate basis and so.
<unk> to explore M&A is definitely something that we're going to look at.
Got it thank you.
Yes.
One moment for the next question.
The next question comes from Frank Louthan with Raymond James Your line is open.
Frank Garrett Louthan: Hey, great. Thank you and congratulations on the on the deal two quick clarifications and then a question.
Who are the additional million homes is targeted to have that done is also about 2027 I just want to verify and then when you said the ABS structure.
Including some other thing I would assume that that was done with the intention to throw and maybe that is having any clarification.
Frank Garrett Louthan: Verifications and then as you look at the competitive nature of the kinetic market can you give us an idea of kind of what the cable overlap is refresh us on that a little rusty on Windstream and.
What percentage of their subs, our ACP customers. Thanks.
Okay, Hey, Frank Good morning, I'll start on the kinetic questions and I'm going to ask drew to comment as well and then I'll ask Paul to comment on the ABS question.
Yeah on the expanded build.
We're currently thinking about that build probably going beyond 2027, and the base case.
And drew will comment on this but part of the expanded build includes.
<unk> program and how that factors in.
Frank Garrett Louthan: Having said that in the cash flow from the business largely funds that build in the outer years.
<unk> said that as I mentioned in my prepared remarks, I think over the next six 912 months, we're going to refine the timing the cadence of that build because I think.
Frank Garrett Louthan: One of the one of the synergies here that we referenced in our opening remarks is having the owner's economics for the business across the entire kinetic footprint is a big deal.
Windstream has been key.
Candid historically about not having a lot of initiatives or motivation to spend and the unity owned kinetic markets beyond the GCI program.
Frank Garrett Louthan: And now that disincentive goes away and so on a combined basis, we've got an opportunity to look across that entire footprint.
And really maybe reshuffle the deck on priorities for builds and it's really terrific.
That opportunity is coming on the precipice of the B program. So.
Ill ask drew to comment on that and also the competitive nature of the footprint and then we'll go to your ABS question, Yes, Thanks, Kenny and good morning, Frank Yeah on the build we definitely see the long term opportunity to expand to build but to touch on the current so today, we cover around $1 5 million households in our footprint. So that's about 35% coverage.
With fiber today, we've been growing that really over the last five years really with the GCI program, enabling a lot of that over the next couple of years will be focused on completing our art off in public private partnership builds which is around 300000, and ultimately that will get us to around $1 9 million households around that 2002.
Seven timeframe, but it's.
As Kenny mentioned as we work with the team here will be evaluating how we can expand that with the ownership economics at this transaction provides us.
A little bit deeper on the kinetic market overlap when you think about competition.
At the highest level I would say, we overlap with charter and about 40% of our households.
And then with Comcast and about 15% to 20%.
And then around several regional cable companies of about another 20% and then about.
The final, 20% really have no wireline overlap and we'd be competing against predominantly a fixed wireless play.
And then lastly, your question on ACP, So today kinetic service around 100000 ACP customers.
Frank Garrett Louthan: And we've definitely been watching the policy decisions, there and expect that the funding for ACP to go away in mid May.
Our strategy perspective, we plan to provide our customers a credit to retain them. We think thats. The best solution for US we looked at a lot of different variables.
Of what we could do with our customer base, but we felt like retaining them and providing a credit for a period of time was the right solution to retain that 100000 customer base.
Alright, Frank Paul Good morning, I'll jump in and tackle the avs portion of your question.
Yes, so as you know ABS.
As a financing market that unity is excited about we've just just recently introduced it into our capital structure and we think there are a lot of benefits to.
Continuing to do that and potentially expanding that.
Going forward, just the cost of capital from ABS.
The leverage sort of arbitrage there I think.
<unk> that we think is definitely accretive to our to our capital structure going forward.
The ABS debt that we're that we've launched is.
Focus on the unity fiber assets.
Which we believe the market will be very receptive to when we get to a more full or fuller ABS take out of the current bridge structure that where we're in today.
<unk>.
Thinking about ABS and Windstream and drew certainly invite you to comment if he has some thoughts on this as well I think the market has definitely shown.
Drew Smith: That it is receptive to securitizing.
Or to the home markets going forward as well, so I think thats definitely a possibility and something that we're going to look to explore more deeply.
Certainly in the current structure of the two.
The two companies.
ABS is difficult on the kinetic out assets.
The separation of the operations from the ownership of the asset just doesn't lend itself very well to securitization.
But and Recombining those assets, we think it would lend itself extremely well to securitization overtime.
They would need to be markets that are that are fiber arised.
That have some level of cash flow maturity in terms of.
Their development.
But wind streams.
Kinetics fiber to the home build plan is well underway.
<unk> already achieve.
Achieved fiber.
Drew Smith: Coverage in a number of their markets. So I think there'll be ample opportunity to look at that going forward. It would probably I would think probably be a separate program than the energy fiber program just given the.
Different types of assets in geographic regions, but certainly are.
Uniti getting his feet wet a bit in the ABS market and learning that and introducing ourselves to.
Creditors and the market should definitely help our ability to <unk>.
Expand that further on the combined business.
Alright, great Thats really helpful. Thanks, guys.
One moment for the next question.
The next question comes from <unk> <unk> with Bank of America. Your line is open.
Hi, Thanks, very much just a few more clarifying questions.
The debt structure. So first of all on the 300 million dollar bridge loan what is that.
It's a bridge to what.
Speaker Change: Where would you expect to.
Raise the new funding was it bigger.
<unk> added more consolidated level.
Yeah Ana this is Bob good morning, Thanks for the question.
The bridge commitment that we have the $300 million bridge commitment that we're announcing is a part of this deal.
It's really a bridge too.
Additional securities offering in the market, so likely a high yield securities offering that could be an add on to an existing.
Speaker Change: Issuance or it could be.
New new Standalone issuance as well, but it's really a bridge to.
To that type of security and that would that would likely be our intention in terms of taking out that bridge.
Okay, Okay, but the question was.
Would it be one of the silos.
It would be at the consolidated level, yes.
It would be within the unity existing unity siloed today, so our intention would be to keep the silos separate and independent and for <unk>.
<unk> for that.
At closing two to live in one of those two silos and to keep those silos intact. So any new securities offering we did in conjunction with that bridge would be under the existing <unk> silo.
Okay, and then so is that kind of master plan on that.
Evolution of the structure would be that over time, the unity silo with would be that.
One that survives and over time, you would sort of unwind the windstream silo.
I think that's a distinct possibility and I think there are a number of ways that we could manage the capital structure and the silos going forward keeping.
Keeping the silos in place is the.
The REIT structure.
Speaker Change: Combined the company at closing.
Speaker Change: It preserves existing debt.
A lot of which as I mentioned before is fixed at attractive rates with distant maturities.
Only view debt with coupons at 475%, 6% six 5% with maturities in 2829 30 is as assets of the company.
But managing two silos.
There's going to be complex.
And so our philosophy is going to be to look opportunistically at simple.
Simplifying and collapsing those silos as soon as it is.
As soon as it's prudent to do so but.
We've got time, we don't have to be in a hurry.
So we can afford to be opportunistic in doing that so.
Say that we're going to do what makes economic sense and preserves our enhances the quality of the credit and so I think we'll have ample opportunity to do that and there's there's a few ways. We can accomplish that and we're going to continue to evaluate that.
The opportunistic about how we manage those going forward, but our intention would be to look to collapse those those silos.
It's prudent to do so.
And then additionally in order to preserve the two silos is the master lease is going to remain in place because I think that's a key component of.
Of what supports that Uniti credit silo right now.
Yes.
The master lease will be an important part of preserving those silos and we will we will stay in place I don't know Ken if you want to comment on that any more than that.
And it will stay in place and there'll be an arm's length relationship between the two silos.
We're we're perfectly set up between the two companies to continue managing those responsibly, but as Paul said, we certainly want to get to a more simplified debt structure as soon as we can and I don't think you mentioned it Paul but when you when you look at the maturities of the debt.
Windstream the majority of it.
A large portion of Windstream debt is coming due soon sooner that hours in 2027.
And then I think even the bond that matures later and drew you can comment on this is callable in 2026 2027.
On it when you look at the Windstream debt stack, we've got our term loans coming due in 2007 as kidney noted.
The bond comes due in 2028 would be but would be callable, if something opportunistic when it would occur.
Okay, Great and then final question if I may so just on the terms of the pit.
What is the rate on that end.
Is it not.
Pat Im sorry preferred.
Does that is that going to be paid in kind or is that going to be a cash payment instrument.
Yes, Paul I'll take that again.
The pic.
Speaker Change: The initial.
Right on that is 11%.
It does step up start to step up in the out years that is capped it at 16%.
Over time, we have the option to pay in cash.
Or in kind and I think we're going to manage that prudently as we go forward I don't want to sort of lock us into any one particular position but.
With regard to how we're going to settle out over time, but we have the option to do either.
Okay. Thanks, so much.
One moment for the next question.
The next question comes from Bora Lee with RBC capital markets. Your line is open.
Thank you.
So FPGA twist discussed a fair bit on the call for the combined company. How are you thinking about the relative capex emphasis on that.
Bora Lee: First as wholesale.
On a go forward basis.
Okay.
Kenny: Hey, Boris it's Kenny.
I think I think the.
The capital spend.
At our fiber business.
And bind with Windstream wholesale will be consistent with what we've been spending historically, so we're not planning to to reduce any of the spend we are planning to continue investing heavily in that business, but with that said, we do expect capital intensity to continue coming down.
And I think Thats, primarily a reflection of the continued focus on lease up.
In our view that particularly on a combined basis I think the windstream wholesale business is going to fit very nicely with our existing network. There's a lot of overlap as you would expect and so I think we're going to be able to continue bringing that capital intensity down, but we're not we're not we're not.
We're not going to change the investment philosophy, there is going to continue as it currently is and with kinetic.
As drew mentioned and as we agree I think the investment plan.
Kenny: As continuing unaltered.
Other than we might be expanding it.
We're certainly going to be expanding it for the for the expanded build and we'll report more on that when it's more refined.
But I think thats going to be an important focus over the next few years in particular.
And then and then after that three or four year period, Youll start to see capital intensity come down there as well.
Okay.
On the Hyperscale demand that Youre seeing can you talk about if these are existing routes or new builds and touch on.
And that's being driven by AI to reach end users large connect data centers any sense that might happen there.
Yes, it's really all of the above board.
We are seeing.
We're seeing new builds we're certainly seeing lease up on existing existing infrastructure, whether it be dark fiber or waves.
As we've talked a little bit about.
On the new builds.
The Hyperscale is our good partners on helping get those built built.
Kenny: At economics that work for both parties.
A bit of what we talked about in our prepared remarks.
Some of what some of the couple of deals that happened in the first quarter were really new builds.
We haven't done a lot of that on inner city routes in some time, but we're starting to do more of it drew.
Driven by that demand.
And we do expect to see more of it going forward and to your point about connecting data centers, that's really what it is.
It's one of the reasons, we're excited about the tier two and three routes that we have on this unique network on a combined basis with Windstream wholesale because I think a lot of these data centers are being put in unique markets.
And part of Thats, driven by the need to get to less.
<unk> burden parts of the grid frankly from a power point of view and so I think theres going to be a lot more opportunity for us.
Those datacenters connecting unique tier two and three routes.
And Thats, particularly true on a combined basis.
Great. One last one if I could can you remind us what approvals you would need and if there are particular jurisdictions that may be the long pole on the tent I am thinking maybe particular states.
Yes, I think.
We said to expect closing in the second half of 2025.
We're going to need federal and state PUC approvals, we have a point of view on who the long pole might be we'll reserve, calling that out, particularly some of the states in particular, but.
I think I think we'll leave it at just targeting that.
Got it thank you.
One moment for the next question.
Yeah.
And our last question comes from Jeff Harte Lib with Barclays. Your line is now in Spain.
Alright, thanks, congratulations on the merger.
So.
I'm just wondering.
You've talked about.
The ABS financing of unity and potentially.
Kinetic.
When you think about down the road as you fund your <unk>.
Increased fiber build I think previously we scope and wind screams capex will come down and clearly there's going to be more funding for additional pass things.
Do you see that coming potentially from these ABS transactions.
Do you see yourselves, putting in additional credit facilities.
To fund this capex as well as for additional liquidity for the combined company.
Hey, Jeff This is Paul I'll start with that and Kenny can certainly jump in and add.
If you'd like to.
Thank you.
Part of the piece of this deal, especially with a $300 million.
Commitment that we talked about this as a fully funded plan.
Kenny: And we've sized the balance sheet and liquidity liquidity.
Appropriately to fully fund the plan.
<unk>.
You talked about sort of the timing of additional household so as the current kinetic build plan whines down around 2027.
The free cash flow profile of the business would allow us to.
To begin investing in incremental homes up towards that $1 million I'm, sorry, the 1 million household.
Number that that Kenny Andrew talked about earlier, so I think theres an opportunity to fund that increased build out of cash flow going forward. If we if we sequence it in that way if we wanted to accelerate it I think there is.
Kenny: Yeah.
There is ample opportunity for us to find.
The financing.
To do so, but we're going to evaluate that and we'll do so if it if it's prudent and value accretive for the company. So I think it just depends on sort of the approach that we take there.
Beat is going to figure into certainly into our plans going forward with how we how we build out that network and the timing of it as well. So I think there is more to do there to.
To determine the right timing and the right level of investment, but there is ample opportunity to invest above the existing plan with with the free cash flow of the business.
Got it okay and with the kinetic.
Kinetic ABS.
Dancing happen potentially earlier than that.
Yes, I think that's something that we're going to evaluate I don't think we're quite ready to comment on.
Timing of that but I definitely think it's like we said before.
An opportunity that could allow us to potentially accelerate some of those builds.
Great. Thank you.
I would now like to turn the call back over to Kenny for closing remarks.
Thank you. Thank you again for joining us on today's call as you heard. This morning, we're very excited about this combination, which we believe will deliver significant value for shareholders as well as for employees customers and on a broader scale our communities.
We look forward to providing you with additional updates in the coming months. Thank you for joining.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Kenny: Okay.
Okay.
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Okay.
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Yes.
Okay.
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Okay.
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