The finalization of Windstream's (NAS: WIN) acquisition of PAETEC yesterday brought a sigh of relief from its shareholders. After all, they did not want to see anything happen that could disrupt the company's generous dividend, which yields a very nice 8.5%.
CEO Jeffery Gardner did say during the company's second-quarter conference call in August that, "We remain incredibly focused on the dividend at Windstream and understand how important this is to our shareholders."
Gardner's feelings about dividends were echoed by CFO Anthony Thomas, who said in the third-quarter conference call last month that "the steps we are taking ... [will] provide security toward the most attractive dividend yields in the S&P 500."
All's well that ends well
This story had a happy ending, but it could have just as easily gone sideways. After the deal was announced in August, some PAETEC shareholders hired two law firms to investigate and possibly sue the company's board of directors for accepting what they considered too low of a price. Level 3 (NAS: LVLT) was even brought into the equation as a rumored competitor, one said to offer a 30% higher bid than Windstream's.
A settlement was finally worked out in October and PAETEC shareholders voted to approve the merger. Those shareholders ended up getting 0.46 share of Windstream stock for each of their PAETEC shares. At yesterday's closing share price, that turned out to be worth about $5.38 a share.
The FCC's opinion
The Federal Communications Commission gave the deal its seal of approval Tuesday, saying it "poses no significant competitive harms and should provide benefits to residential and business customers." That is quite different from the negative preliminary staff report the FCC released on the same day regarding the effects the proposed AT&T/T-Mobile merger would have on competition and costumer benefits.
This $2.3 billion deal is the eighth and largest such acquisition Windstream has made since it was formed in 2006. The company expects it to boost its appeal to enterprise customers by enhancing its fiber, Ethernet, and data center resources.
Unlike rival second-tier telecoms CenturyLink (NAS: CTL) and Frontier (NYS: FTR) , which also have been expanding via mergers and acquisitions, Windstream has been doing it in more bite-sized chunks. Piece by piece, it has been assembling a network that now can access business customers in 46 states through 100,000 miles of fiber.
Get bigger or get gone
This merger is an example of the continuing consolidation of the incumbent local exchange carriers with the competitive local exchange carriers. The latter sprung up after the U.S. government made the original AT&T, aka "Ma Bell," de-monopolize itself by breaking into seven separate and independent operating companies. They have proliferated and have created a splintered telecom industry that is starting to reform itself.
Size will become ever more important as the telecom companies and the cable companies start competing for customers with the same products, wireline and wireless broadband Internet portals which will provide voice, data, streaming video, gateways to cloud-computing storage and services, and whatever else is in our futures.
Second-tier wireless carriers like MetroPCS (NYS: PCS) , Leap Wireless (NAS: LEAP) , and US Cellular (NYS: USM) have seen the regional wireline telcos starting to encroach on their turf by reselling the wireless services of Verizon and AT&T. And the cable companies, watching their video customers unsubscribe to view streaming video over their data portals, are giving the wireline carriers something to worry about. The service lines are becoming muddier.
A bottom line
So it's good that Windstream finally got all the t's crossed and the i's dotted on this PAETEC deal, but shareholders shouldn't be surprised if there are more acquisitions coming up. As long as the company doesn't overextend its reach in that regard and keeps its growth at a manageable pace, I can feel comfortable giving Windstream a thumbs-up rating in CAPS.
But I do have one caveat. If you are considering Windstream for its dividend alone, I recommend checking out fellow Fool Paul Chi's article on high-yielding telecom stocks. It's a valuable read.
Windstream and the other telecoms are itching to get into cloud-computing services. One way to learn more about "the cloud" is to ask for this free special video report put together by Motley Fool analysts: "The Two Words Bill Gates Doesn't Want You to Hear..."
At the time this article was published Fool contributor Dan Radovsky owns shares of AT&T and Frontier. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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