Winstream provides 3,000,000 access lines in 16 states, and is headquartered in Little Rock, Arkansas

Windstream Corporation has announced a massive 9.4 percent dividend, one of the largest among S&P 500 companies.  Big dividends are a trait common with independent phone companies that have used dividend payouts to fuel their stock value, making shares valuable to income investors.  Michael Nelson, a Soleil Securities analyst told Investors Business Daily Windstream’s preoccupation with mergers and acquisitions has been the primary reason the company has been growing, even as landlines continue to be a dying business.

“The CEO is embarking on a roll-up strategy of smaller disconnected companies; there are literally hundreds of them.”

He adds that CEO Jeff Gardner has a history of successfully executing a strategy of mergers and acquisitions while he was the chief financial officer of Alltel, the company from which Windstream spun off.

By growing a company through mergers and acquisitions, even as consumers disconnect their core product – landline phones, providers can still demonstrate growth to shareholders.  But once industry consolidation slows, any evidence of a decline in revenue is likely to prove punishing to the stock’s price.

Windstream’s latest acquisition, NuVox, Inc., is preparing for significant layoffs once the transaction closes in early February.  Most of NuVox’s senior management are rapidly departing the soon-to-be-merged company.

The rest of the company’s 1,700 employees are concerned about their future employment.  Some 700 workers at the company’s headquarters in Greenville, South Carolina are likely to bear the brunt of downsizing NuVox’s administrative functions.

Windstream COO Brent Whittington told the Charleston Regional Business Journal that the company’s headquarters building and many employees will be retained, at least at the outset.

“How much will we need going forward, I don’t know,” Whittington said.

Much of NuVox’s IT and customer service departments will remain in place, though some administrative functions in Greenville, such as accounting and human resources, could be lost, Whittington said.

“What that will mean for the ultimate headcount in Greenville, I don’t know right now,” he said.

Most prior mergers have resulted in significant job losses as a result of consolidation, in an effort to realize “cost savings.” The worst losses occur in offices dealing with administrative functions, often deemed redundant by the new owners.

For nearly 100 years, D&E Communications has served the people of eastern and central Pennsylvania from its headquarters in Lancaster.  But the company founded in 1911 by William F. Brossman, an area farmer and fertilizer distributor, never saw its centennial after being snapped up by Windstream Communications in a $333 million dollar deal.

What Brossman planted so long ago brings a bountiful crop of benefits for the top five former executives of D&E and the plowing under of 70 percent of D&E’s other employees, who are being shown the door between today and April 9th.

The Winners

Four high-ranking executives had provisions in their contracts with D&E that required the company to pay six-figure payments should the company be sold.   Thomas E. Morell, Albert H. Kramer, Stuart L. Kirkwood and Leonard J. Beurer are offered the stacks of cash as an incentive to get them to stay with the company, even as hundreds of others don’t get that choice.

Former D&E CEO James W. Morozzi gets a consolation prize of $942,000, not including benefits.

The Losers

D&E employees will be let go with considerably less (perhaps a cardboard box to hold their possessions as they are escorted from D&E buildings.)

Windstream filed papers months ago with the state Department of Labor and Industry detailing the slashing of D&E’s workforce, declaring most redundant and no longer needed, providing some of the “cost savings” that fuel these telecommunications deals.

For Lancaster County, as many as 270 of D&E’s 340 workers will be abandoned.  For eastern and central Pennsylvania as a whole, 500 jobs will be reduced to 200 or less in Ephrata and Birdsboro.  What made D&E “local” to Lancaster County and this part of Pennsylvania will be no more.  Local customer service and support call centers are also being eliminated — transferred to existing Windstream centers in Cornelia, Georgia and Charlotte, North Carolina.  Customers who have paid their D&E bills in person at the company’s Birdsboro office will have to make other arrangements — they are weeding out that service as well.

Windstream Corporation has agreed to acquire Newton, Iowa-based Iowa Telecom for $530 million in stock and cash, making it the fourth acquisition for the rural-focused Windstream in 2009.  It will also take on $600 million of Iowa Telecom’s debt as part of the transaction, which caused Standard & Poors to reduce Windstream’s credit rating to junk status – BB.

Like Frontier Communications, Windstream is engaged in aggressive expansion to stake out its position serving rural America.  The company has spent $1.3 billion on acquisitions in just the last six months, trying to keep up with other large independent providers like Frontier and CenturyLink.

“Our whole investment thesis was to grow scale in rural America,” Windstream Chief Executive Jeff Gardner told the Wall Street Journal. “I still think there’s a great deal of consolidation left with smaller players, where the pressure is the most obvious.”

Windstream, based in Little Rock, Arkansas, serves customers in 16 states, mostly in the midwest and south.  Iowa Telecom serves former GTE service areas in Iowa and Minnesota.

For employees in Newton, east of Des Moines, the purchase brings fear of significant job reductions.  Iowa Telecom has 800 employees, and comments by Windstream’s Gardner suggest downsizing is forthcoming.  Windstream expects $35 million in cost savings annually, and some of that will be achieved by dispensing with unneeded Iowa Telecom workers post-merger.  Windstream has only promised to maintain a call center in Iowa.

WHO-TV Des Moines reported Windstream’s buyout of Iowa Telecom was like “lightning striking twice” for Newton residents, leaving an economically-challenged community in fear. (11/25/09 – 2 minutes)

Iowa Telecom provides customers with a familiar bundle of services common among independent phone companies.  As well as providing traditional wired phone lines, Iowa Telecom markets Xstream DSL at speeds up to 15Mbps in some areas, and resells DISH Network satellite service for customers looking for a video option.

Lexcom's DSL price chart shows budget-busting prices for relatively slow DSL service

Windstream provides DSL service up to 12Mbps in some areas.

Before Iowa Telecom, Windstream’s earlier acquisitions included:

• D&E Communications of Pennsylvania — Windstream fetched the independent provider in a stock and cash transaction that added about 150,000 additional telephone lines to Windstream’s portfolio in Pennsylvania.
• Lexcom — Windstream picked up this Davidson County, North Carolina independent for $141 million.  Lexcom needs serious technology upgrades to improve service.
• NuVox — A Greenville, South Carolina-based business services provider.

Windstream has hinted they’re not done with acquisitions yet, fueling some speculation their next targets may be Consolidated Communications, which provides service in Illinois, Pennsylvania, and Texas or Alaska Communications Systems, another business service provider.

KCCI-TV Des Moines reported residents of Newton were “shocked” and “disturbed” about the Iowa Telecom buyout, because of potentially staggering layoffs to come after Windstream closes the deal.  (11/24/09 – 2 minutes)

Not everyone is singing the blues about Windstream’s buyout of Iowa Telecom.  Despite the transaction’s impact on Windstream’s credit rating, Wall Street has supported Windstream with a strong stock price, owing to the company’s relentless desire to deliver dividends to stockholders.

http://www.phillipdampier.com/video/CNBC Cramer on Windstream 12-7-09 1025.flv

CNBC’s Jim Cramer loves the “massive dividends” Windstream provides to stockholders.  But Cramer also issues some caveats, reminding viewers of FairPoint Communications, another former high-dividend stock… until it went bankrupt.  Cramer interviews Windstream CEO Jeff Gardner about the company and the future of independent phone companies in general.  (12/7/09 – 10 minutes)

http://www.phillipdampier.com/video/CNBC Windstream Profile NASDAQ 12-10-2009 222.flv

CNBC reports on Windstream’s move to the NASDAQ and interviews CEO Jeff Gardner about the future for the telecom industry in general.  (12/10/09 – 2 minutes)

Phillip "I Also Told You So" Dampier

This past spring Stop the Cap! started relentlessly documenting the tragic phone and broadband service that came as a result of a lousy phone deal for New Englanders.  Verizon, busily wiring its larger service areas for FiOS fiber to the home service, wanted out of Maine, New Hampshire, and Vermont.  In a uniquely wonderful deal (for them), they not only managed a clean break from too much regulatory red tape, but also sold off the entire operation down to the last cable, phone jack, and building absolutely tax-free to FairPoint Communications, a tiny independent phone company headquartered in North Carolina.

Since the sale, it has been one catastrophe after another:  broken phone and broadband service up to weeks at a time, incorrect billing amounting to hundreds of dollars and collection calls pestering customers for money they don’t owe, investigation after investigation, broken promise after broken promise.  Since we broke from the story back in June to cover some of the nonsense and ripoffs going on in Canada, things have not gotten that much better.  In fact, the company’s stock has since lost 95% of its value, is defending against accusations it manipulated a “test run” of a conversion program to guarantee success (right under the noses of independent observers), a major management shakeup, and now the very real chance the entire mess is headed to Bankruptcy Court.

One member of the International Brotherhood of Electrical Workers, who loudly and, it turns out, very accurately predicted the results of this ill-conceived venture, said FairPoint is now swirling in the bowl, flushing itself, and three states’ telecommunications needs, right down the toilet.

So at the same time Frontier Communications is trying to pick up what Verizon is throwing away this year, it’s very illustrative to continue this story, to educate our readers about what happens when consumers’ needs are totally ignored.  Just as much to blame are the state regulators who are now ironically among the loudest complainers.  As we’ve shown documenting this entire story, they’ve changed their tune dramatically.  Back in 2007, they couldn’t say enough wonderful things about how confident they were in FairPoint, and were certain everything would work out just fine.

It did for them because they are still there, conducting the investigation about how this whole mess got started.

The Nashua Telegraph has followed this sorry story since day one:

Unable to make its massive debt payments, FairPoint will have to file for bankruptcy by month’s end unless it can strike a deal with creditors.

The company is losing land-line customers – and thus, revenue – faster than anticipated. And the celebrated launch of a TV service to compete with cable – a move FairPoint said would bring in the extra income to compensate for the decline in land-line customers – has been put on hold.

“There’s no satisfaction in saying I told you so,” said Rand Wilson, communications coordinator for the two unions that represent most FairPoint workers, which organized a major public campaign in an effort to stop the sale.

“We have to try to provide the best possible service under the circumstances and work with regulators and states to find a way to create a viable company.”

So far, that means trying to fix FairPoint from within, or hope the rumors of a buyout by Windstream, another owner of formerly independent phone companies, turns out to be real. But like FairPoint and Frontier, Windstream itself has a business model running phone service in the areas the big boys don’t want. How much of an improvement that company would provide remains an open question.  Regardless, unless FairPoint works the kind of magic it has never performed for its New England customers, it’s probably only a matter of weeks before bankruptcy:

P.J. Louis, a telecom industry expert and author of 11 books on the various topics within the industry, recently wrote that he thinks it’s a realistic option for the company.

“The more and more I think about it, the more I am convinced that FairPoint needs to file,” Louis wrote in an analysis on the Gerson Lehman Group Web site. “Every horror story you hear just scares the heck out of me. Frankly, I am questioning management’s ability to see the company through this rough time.”

Frontier Communications, the telephone and broadband provider in Rochester, New York, is now positioned for consolidation, according to StreetInsider.com, a financial news and investor information site.

Frontier has completed several mergers and acquisitions in the past year, as part of the ongoing consolidation in the telecommunications provider sector.  Frontier’s value as a takeover target has been increasing, as the company reduces its debt and has received stable ratings from independent rating companies.  A Piper Jaffrey analyst said the company remained open to both buying and selling assets.

The background buzz continues to focus on some sort of deal between Windstream Corporation and Frontier.  Analysts spoke last year of Frontier being the likely target of Windstream for a buyout, but the economy then took a nosedive.

Windstream is another independent telephone company comprised of the old Alltel telephone company and ValorTelecom.

That the financial press has taken a renewed interest in both stocks may signal a play in the coming weeks or months.

Reuters reported this week that a wave of consolidation in the rural telephone marketplace is about to begin as telephone companies fight  continued declines in the telephone access line business.

The biggest target for a takeover?   “Frontier Communications,” says Stanford Group analyst Michael Nelson. “They’re really the only one that would move the needle significantly,” he said.

Frontier targeted for takeover?

Frontier, based in Stamford, Connecticut, is the nation’s fourth largest independent largely-rural telephone company, with 2.3 million telephone lines.

In the market for merger opportunities, and speculated to be looking  closely at Frontier, is Little Rock, Arkansas-based Windstream Communications.   Windstream, the nation’s second largest rural telephone company, announced it was aggressively interested in pursuing merger opportunities.

Little Rock-based Windstream Communications seen as likely suitor for Frontier Communications

Windstream’s takeover of Frontier is seen  by some industry observers as practically a done deal.  

Nelson sees a Frontier deal in about six months, costing Windstream $9 billion, including the assumption of about $4.6 billion in debt.

Big deals that maximize cost savings would make sense for Windstream, according to Jefferies analyst Jonathan Levine, who said closing even small deals require a lot of money and time as they involve reviews from the regulators of each state where the target companies have operations.

“I think they’re going to probably look at some of the larger players,”  Levine told the Reuters wire service.

Windstream's Broadband Promotional Pricing for 12 Months

Such a merger would likely leave Windstream in charge of the merged company.   Windstream has aggressively deployed broadband DSL services into their rural service areas, with speeds dependent on the infrastructure available in different areas.

Windstream has no plans to implement usage caps on broadband customers at this time, nor does it charge customers for company-supplied modems.   It is too early to speculate about the impact a merger would have on existing Frontier employees.   Windstream already provides customer and technical support from call centers in India and Georgia and has a track record of eliminating or reducing staff at  call centers formerly run by its acquisition targets.

Windstream's coverage area, providing local phone service in 16 states

Windstream was created primarily from the old Alltel network of local telephone companies, mixing in customers from VALOR/GTE Southwest, GTE Georgia, Standard Group, Aliant, and CT Communications.   From a series of acquisitions, it rebranded itself as Windstream Corporation in 2006, dropping the Alltel name.

Consolidation is expected to become a growing factor in the independent telephone company marketplace, as companies face significant challenges from cable systems and wireless phone companies.

The nation’s number three independent telephone company, CenturyTel of Monroe, Louisiana, may also be interested in  Frontier, and could spark a bidding war  for Frontier’s assets.    CenturyTel is also reportedly looking at  Iowa Telecom or Consolidated Communications as potential merger targets.

Only one independent telephone company, the nation’s largest, Embarq, spun off by Sprint-Nextel, is not likely to be in a position to begin a shopping spree.   Analysts report the company’s poorly positioned to embark on a merger adventure because of the company’s perceived lower value.   Analysts have urged Embarq to begin cost-cutting and improve earnings.

Frontier Communications stock has been progressively increasing in value since merger speculation began.   The company is currently trading at 12.72 per share.