Windstream 2006 Annual Report Download - page 105

Carson, Anderson & Stowe (“WCAS”), a private equity investment firm and Windstream shareholder. The transaction
will be effected pursuant to the terms of a Share Exchange Agreement (the “Share Exchange Agreement”) entered into
among Windstream and Welsh, Carson, Anderson & Stowe VIII, L.P., a Delaware limited partnership; Welsh, Carson,
Anderson & Stowe IX, L.P., a Delaware limited partnership; WCAS Capital Partners III, L.P., a Delaware limited
partnership; Regatta Holding I, L.P., a Delaware limited partnership; Regatta Holding II, L.P., a Delaware limited
partnership; and Regatta Holding III, L.P., a Delaware limited partnership (each a “WCAS Sub” and together the
“WCAS Subs”). Anthony J. de Nicola, a WCAS partner, was a member of both the Valor and Windstream Board of
Directors through the announcement of this transaction, at which time he resigned.
Prior to completing the transaction, Windstream will contribute the Publishing Business to a newly formed subsidiary
(“Holdings”). Holdings will then pay a special dividend to Windstream in an amount equal to Windstream’s tax basis
in the Publishing Business (currently estimated to be approximately $30.0 million), issue additional shares of Holdings
common stock to Windstream, and distribute to Windstream certain debt securities of Holdings having an aggregate
principal amount of approximately $250.0 million less the amount of the special dividend. Windstream expects to
exchange the Holdings debt securities for outstanding Windstream debt with an equivalent fair market value and then
retire that Windstream debt. Windstream also intends to use the proceeds of the special dividend to retire Windstream
debt or repurchase Windstream equity. Following the completion of these transactions, Windstream will exchange all
of the outstanding equity of Holdings (the “Holdings Shares”) for an aggregate of 19,574,422 shares of Windstream
common stock (the “Exchanged WIN Shares”), which will then be retired. At the time of signing, the WCAS shares
were valued at approximately $275.0 million based on a trailing average of Windstream’s stock price of $14.02 at that
time. Given the value of the stock at the time of signing, the total value of the transaction was approximately $525.0
million. Based on the four day trailing average of Windstream common stock at February 23, 2007 of $15.05, the
Exchanged WIN shares have a value of approximately $295.0 million, increasing the expected total value of the
transaction to approximately $545.0 million.
In order to comply with the covenants in Windstream’s debt instruments, subject to the terms and conditions of the
Share Exchange Agreement, Windstream will exchange 80% of the Holdings Shares for 80% of the Exchanged WIN
Shares in a first-step closing that is expected to occur during the second quarter of 2007. The remaining Holdings
Shares held by Windstream will be exchanged for the remaining Exchanged WIN Shares in a second-step closing that
is expected to occur during the fourth quarter of 2007. The first-step closing is subject to customary conditions,
including (i) expiration of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, (ii) the parties having received certain private letter rulings from the Internal Revenue Service (“IRS”) with
respect to the tax treatment of the transactions, (iii) the receipt of customary solvency and surplus opinions by the
Boards of Directors of Windstream and Holdings, and (iv) the contribution of the Publishing Business to Holdings and
the exchange of Holdings debt for outstanding Windstream debt. The Company has since satisfied the requirements of
the Hart-Scott-Rodino Act. The second-step closing is conditioned only on the absence of any injunction, but will not
occur until Windstream is able to exchange the remaining shares in compliance with the terms of its debt instruments.
The terms of the Share Exchange Agreement require the transaction to be completed by December 31, 2008.
The Share Exchange Agreement provides for a customary working capital adjustment pursuant to which the parties
will make cash payments to each other to the extent that the working capital of the Publishing Business is less than or
greater than a specified target working capital amount at the time of the first-step closing. The Share Exchange
Agreement contains customary representations, warranties and covenants and may be terminated if, among other
things, the first-step closing of the transaction has not been completed within twelve months or the IRS private letter
rulings are not received. The parties have also agreed to customary indemnification for breaches of representations,
warranties, covenants and other matters.
In connection with the consummation of the transactions contemplated by the Share Exchange Agreement, the parties
and their affiliates will enter into certain related ancillary agreements, including a Publishing Agreement, a Billing and
Collection Agreement and a Tax Sharing Agreement. Pursuant to the Publishing Agreement, Windstream will grant
Windstream Yellow Pages, Inc. (“Windstream Yellow Pages”), the Windstream subsidiary that currently operates the
Publishing Business, an exclusive license to publish Windstream directories. Windstream Yellow Pages will, at no
charge to Windstream or its affiliates or subscribers, publish directories with respect to each Windstream service area
in which Windstream or its affiliates are required to publish such directories by applicable law, tariff or contract.
Subject to the termination provisions in the agreement, the Publishing Agreement will remain in effect for a term of
fifty years. As part of this agreement, Windstream agreed to forego future royalty payments from Windstream Yellow
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