Windstream 2006 Annual Report Download - page 177

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Quarterly Financial Information - (Unaudited), Continued:
E. During the fourth quarter of 2005, the Company incurred $31.0 million of incremental costs, principally
consisting of $31.2 million of investment banker, audit and legal fees, related to the pending spin-off from
Alltel and merger with Valor (See Note 10). In the fourth quarter of 2005, the Company reduced the
liabilities associated with the wireline restructuring activities by $0.2 million to reflect differences between
estimated and actual costs paid in completing the employee termination. In the fourth quarter of 2005, the
Company also adopted the measurement and recognition provisions of FIN 47 in accounting for conditional
asset retirement obligations. The cumulative effect of this accounting change resulted in a one-time
non-cash charge of $7.4 million, net of income tax benefit of $4.6 million (See Note 3).
F. In the third quarter of 2005, the Company recorded a restructuring charge of $4.7 million in restructuring charges,
which consisted of severance and employee benefit costs related to a planned workforce reduction (See Note 10).
17. Pending Transactions:
On December 12, 2006, Windstream announced that it would split off its directory publishing business (the
“Publishing Business”) in what Windstream expects to be a tax-free transaction with entities affiliated with
Welsh, 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 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 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 Scott-Hart-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.
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