Windstream 2014 Annual Report Download - page 211

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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F-95
16. Pending Transaction - Proposed Spin-off of Certain Network and Real Estate Assets:
On July 29, 2014, we announced plans to spin off certain telecommunications network assets, including our fiber and copper
networks and other real estate, into Communications Sales & Leasing, Inc. (“CS&L”), an independent, publicly traded real estate
investment trust (“REIT”). We will also contribute substantially all of our consumer competitive local exchange carrier business
to the REIT, which will continue to operate this business. The REIT will lease use of the assets to us through an exclusive long-
term triple-net lease with an initial term of 15 years at an initial estimated rent payment of $650.0 million per year. The lease is
expected to include up to four 5 year renewal options and provide for annual rent escalations of 0.5 percent after the third year of
the initial lease term. We will continue to operate and maintain the assets in order to deliver advanced communications and
technology services to consumers and businesses. We will also continue to have sole responsibility for meeting our existing
regulatory obligations following the creation of the REIT.
Due to various forms of continuing involvement, including Windstream Corp. remaining the legal counterparty to the various
easements, permits and pole attachments related to the network assets, we will account for the transaction as a failed sale-leaseback
for financial reporting purposes. As a result, the net book value of the network assets transferred to the REIT will continue to be
reported in our consolidated balance sheet and will be fully depreciated over the initial lease term of 15 years. We will record a
long-term lease obligation equal to the sum of the minimum future annual lease payments over the 15-year lease term discounted
to the present value based on Windstream Corp.’s incremental borrowing rate. As annual lease payments are made, a portion of
the payment will decrease the long-term lease obligation with the balance of the payment charged to interest expense using the
effective interest method.
Our board of directors approved a plan to pursue the proposed spin-off following the receipt of a favorable private letter ruling
from the Internal Revenue Service relating to certain tax matters regarding the tax-free nature of the spin-off and the qualification
of the spun off assets as real property for REIT purposes.
As part of this proposed transaction, shareholders will retain their existing Windstream Holdings shares. The spin-off will be
completed through a pro rata distribution of no less than 80.1 percent of the outstanding shares of the REIT to existing Windstream
Holdings shareholders. After giving effect to the interest in the REIT retained by Windstream, each Windstream Holdings
shareholder is expected to receive one share of the REIT for every five shares of Windstream Holdings common stock held as of
the record date in the form of a tax-free dividend. We anticipate the REIT will raise approximately $3.65 billion in new debt, the
proceeds of which will be used to fund a cash payment to Windstream, the amount of which we expect to be approximately $1.2
billion, and to complete a tax-free debt exchange of existing Windstream Corp. debt obligations of approximately $2.35 billion.
Net of estimated transaction costs and financing fees, we expect to reduce Windstream Corp.’s total outstanding long-term debt
by approximately $3.4 billion through completion of the debt exchange and receipt of the cash payment from the REIT. At the
time of the spin-off, Windstream will retain a passive ownership interest in up to 19.9 percent of the common stock of the REIT.
Windstream intends to use all of its shares of the REIT opportunistically during a twelve month period following the spin-off,
subject to market conditions, to retire additional Windstream Corp. debt. We do not expect any significant operational changes as
a result of the transaction.
On January 21, 2015, we announced that we have received all regulatory approvals from state public service commissions required
to consummate the transaction. In anticipation of the spin-off, we intend to reorganize certain of our subsidiaries, including
Windstream Corp., into limited liability companies and take certain other steps to facilitate the proposed transaction. At a special
meeting held on February 20, 2015, Windstream shareholders approved proposals to eliminate the requirement to conduct a
shareholder vote to effect the reorganization of Windstream Corp. to a limited liability company and to effect a reclassification
(reverse stock split) of Windstream Holdings common stock, whereby (i) each outstanding six (6) shares of common stock would
be combined into and become one (1) share of common stock and (ii) to decrease the number of authorized shares of common
stock proportionately from 1.0 billion shares to 166,666,667 shares following the spin-off.
We anticipate that the spin-off will occur in the first half of 2015. On or before March 1, 2015, we intend to convert Windstream
Corp. to Windstream Services, LLC. We plan to maintain our current dividend practice through the close of the transaction. If the
closing date of the spin-off is not on the record date of Windstream’s normal quarterly dividend, we intend to pay a pro rata dividend
to our shareholders based on the number of days elapsed in the quarter. Following the close of the spin-off transaction and the
effects of the 1-for-6 reverse stock split, Windstream expects to pay an annual dividend of $.60 per share and CS&L initially
expects to pay an annual dividend of $2.40 per share.
Completion of the proposed spin-off is contingent on the effectiveness of CS&L’s Form 10 registration statement, final approval
from our board of directors, execution of all definitive agreements, and satisfaction of other customary conditions. We may, at
any time and for any reason until the proposed transaction is complete, abandon the spin-off or modify or change the terms of the
spin-off.