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Windstream Announces Sale of its Data Center Business

On Monday, October 19th, Windstream (NASDAQ: WIN) announced that it had reached an agreement to sell its data center business to TierPoint for $575.0 million in an all-cash transaction.  Windstream was among the first of the telcos to move into the data center space, acquiring Hosted Solutions for $320m in 2010.

Transaction Facts

  • TierPoint is a national, leading provider of cloud, colocation and managed services
  • Combined operations will serve 4,500+ customers with approximately 500,000 sq. ft. of data center capacity in 19 U.S. markets.
  • Transaction has already been approved by both boards and is expected to close within the next 2-4 months.

Strategic Considerations

Transaction will result in Windstream establishing a continuous, reciprocal, strategic relationship with TierPoint as both companies will sell their products and services to one another’s prospective customers as referral partners.

  • Along with the spinoff of its network assets into a REIT earlier in 2015, the data center sale is consistent with Windstream’s continuing effort to delever its balance sheet.
  • Jerry Kent, Chairman and CEO of TierPoint, commented on the transaction and referral partner agreements saying “This is a great strategic fit for TierPoint and our customers.”

JSICA’s Take

  • Transaction has an EV/REV multiple of 4.3x and an EV/OIBDA multiple of 12.9x.
  • Transaction will allow TierPoint to continue to grow its data center business, which already consists of 13 data centers across 8 states.
  • Windstream will continue to generate revenue from data center sales through the referral partner agreement with TierPoint, maintaining a level of exposure to the high growth segment without owning and operating the physical data centers.

Level 3 Rebuts Originating Access Arguments by NTCA and Others

FCC Should Not “Reverse Course” on VoIP-PSTN Traffic

A March 8, 2012, joint letter to FCC Chairman Julius Genachowski from NTCA, Cbeyond, Earthlink, Integra Telecom, NCTA, tw telecom and Windstream incited a strong reaction from Level 3, who filed a rebuttal ex parte on March 14. The initial joint letter (explained here) urged the FCC to state that “all originating access charges are subject to the same treatment pending further reform.” A near-term conclusive statement condoning symmetric treatment of originating access would “ensure that reforms do not disrupt further broadband investment by incumbents or competitors,” the joint letter participants argued. The dispute over originating access rates largely centers on the treatment of VoIP-PSTN traffic, which the joint letter companies believe should be treated the same as PSTN-PSTN traffic. This appears to be a source of contention for Level 3.

Level 3’s response to the joint letter explains, “While Level 3 agrees with the compromise concerning a symmetrical compensation scheme for both TDM-based and VoIP-based service providers, it ultimately believes that the Commission should reject the agreed upon proposal, which would require the Commission to reverse course on the VoIP-PSTN traffic rules it adopted in the CAF Order, and apply the legacy access charge regime to VoIP-PSTN traffic.” Level 3 believes that if the FCC followed the urging of the joint letter parties, the USF/ICC Transformation Order rules would be fundamentally changed, not simply “clarified” as the joint letter parties argue.

Level 3 furthermore “strongly disagrees that the intrastate access charge regime should now be applied to VoIP-PSTN traffic,” and any decision that would apply legacy rules to VoIP “only exacerbated the uncertainty surrounding VoIP-PSTN traffic and would ultimately undo much of the Commission’s efforts to reform the intercarrier compensation regime.” Level 3 also believes that legacy rules would “serve as a disincentive to migrate customers to IP platforms in order for carriers to continue charging higher intrastate originating access rates.”

Level 3 concludes its letter asserting that the FCC “should reject calls to reconsider its rules, and decide against injecting additional legal and financial uncertainty into an industry that is already struggling to implement the current rules adopted in the CAF Order.” From an RLEC perspective, Level 3 certainly got that last part correct—the industry is struggling to move forward under the new regime. However, the FCC will likely need to develop a more extensive record on this VoIP-PSTN originating access issue over the coming months. As illustrated by many rural telecom stakeholders in the ICC reform FNPRM comments last month, originating access is an important source of revenue for RLECs. Any action by the FCC to shrink this revenue base should be met with expanded opportunities to recover lost originating access from the Recovery Mechanism. On the other hand, Level 3’s argument that outdated legacy rules should not bog down IP network migration certainly has merit, too.

Both sides argue that their respective positions will prevent IP investment stagnation and ensure certainty regarding originating access rules. Who do you agree with?


Kentucky’s So-Called “AT&T Bill” Could Instigate Landline Demise

Large ILECs Lobby for a Way Out of Unprofitable Service Areas

Proposed legislation in Kentucky, Senate Bill 135, may hasten the demise of landline service in the state. Although opponents of the bill argue that rural and low-income consumers could be stranded without any reliable and affordable telecommunications options, the “bigger picture” of this bill is that it appears to be aligned with the push by some telecom industry players to phase out the PSTN in the next decade. However, absent any federal rules mandating such a phase-out or implementing a timeline, this bill could be premature and detrimental for rural and low-income consumers in Kentucky.

Senate Bill 135 essentially proposes to end Carrier of Last Resort obligations, particularly for AT&T, Windstream, and Cincinnati Bell. A February 16 article explains that AT&T has lobbied hard for this bill to be passed, and the legislation has earned the nickname “The AT&T Bill.” also notes that AT&T has a powerful lobbying machine in Kentucky, with 31 legislative lobbyists and state campaign donations of $91k since 2007. AT&T and proponents of the bill argue that it is “unfair to burden them with state regulations and service requirements that don’t apply to their cable and wireless competitors;” and there is basically no point in providing landline service to new customers if they are eventually going to migrate to wireless or VoIP anyway. AT&T argues that it “must follow where the market leads,” and being relieved of the obligation to provide landline service will open up new opportunities to invest in wireless and broadband.

What AT&T does not say is why they cannot invest in wireless and broadband anyway, without a rule that allows them to escape COLR obligations. Is providing landline service as a COLR actually hindering investment in other telecommunications services in Kentucky? There is no denying the fact that landline use is declining rapidly, but it is unclear if there is a direct correlation between providing landline service as a COLR and not investing in advanced networks—which AT&T seems to imply is the case. The overall impression is that AT&T wants a legislatively-backed excuse to not have to provide service to rural, remote and low-income consumers—especially if any other company is willing to do it.

The bill would allow an ILEC to refuse landline service upon request if there are at least two other competitive alternatives for voice service, which could be wireless or VoIP, or at least one other broadband provider. The bill also further deregulates landline service, building upon rules adopted in 2006. Senate Bill 135 would relieve the state Public Service Commission from the duty to “set, investigate or determine rates as to any electing telephone utility,” but the commission could still conduct investigations initiated by consumer complaints.

A February 28 Louisville Courier-Journal article clarifies that existing telephone subscribers would not lose service—the bill would only apply to customers requesting new landline service. Since AT&T thinks “Kentucky [has] rotarty-dial laws in an iPhone world,” it is possible that AT&T could go cherry-picking through new service applications, weeding out the unprofitable consumers who have a competitive alternative even if the service quality and reliability is not on par with landline service.  This possibility is raising concerns from public safety, rural consumer groups, and the AARP. A February 27 letter from the Rural Assembly’s Rural Broadband Policy Group to members of the Standing Committee on Economic Development, Tourism and Labor states, “Without basic telephone service, rural people will be further isolated from economic and civic participation, and disconnected from our nation’s vital emergency service network.” The group continues, “The real tragedy of this bill is to further disadvantage the most vulnerable people in Kentucky by cutting their ability to communicate with loved ones, elected officials, potential employers, medical providers, and the society at large.” Among their top concerns are carriers ultimately abandoning landline service completely and “’redlining’ of poor and remote communities where providing service is more costly and higher maintenance.”

It is unclear what the Kentucky RLEC industry thinks about this legislation, but there are surely some interesting interplays between a state bill to eliminate COLR for large ILECs and the overarching federal Connect America Fund reforms. There may be a silver lining for RLECs in AT&T’s desire to abandon unprofitable rural areas—by way of CAF Phase II. If the large ILECs are pushing to end COLR obligations, they might not be interested in accepting CAF subsidies for unprofitable rural areas either. CAF support for these unwanted areas could then be up for grabs via reverse auction—possibly opening up new opportunities for RLECs. Essentially, AT&T’s trash could become an RLEC’s treasure.

Senate Bill 135 on the whole doesn’t appear to be particularly good for rural consumers in Kentucky, especially rural consumers with few competitive alternatives. Also, many questions remain about how service decisions would play out. What metrics for “at least two competitive alternatives” do the ILECs plan to use when making the decision to accept or reject an application? If, for example, a rural consumer has access to 2G wireless and cable service—but cannot afford the cable service or reliably call 911 from the wireless serivce—would the ILEC be allowed to reject the application? Would the broadband alternative have to meet the FCC’s 4/1 Mbps standard? Are satellite and fixed wireless services included, even if they do not support a stand-alone voice service? Does this bill violate longstanding principles of Universal Service, or has that game changed with the passing of the USF/ICC Tranformation Order? One would hope that some of these questions will be resolved prior to a legislative decision.

If this bill passes, it would not be out of line to assume that AT&T will press hard for similar legislation in other states. A similar bill in Mississippi that would relieve AT&T of COLR obligations and downgrade the role of the state commission is also receiving strong opposition because of the perceived threats to rural service. Is the end of days coming for COLR obligations? How will this impact the RLEC industry, given that RLECs are strong advocates for COLR obligations?