All right, let's get started. Good morning and welcome to day one of TD Cowen's 52nd TMT Conference. My name is Greg Williams. I cover the cable, wireless, and telco space here at Cowen. I'm joined in this session by President and CEO of Uniti, Kenny Gunderman. So let's get started. Kenny thanks for joining us.
It's great to be here, Greg. Good morning, everybody..
So let's get started just on the obviously, the Windstream deal is very top of mind. The stock did react rather strongly to the news that Windstream deal is down 40-odd% since the day before the announcement. So now that you see the way the market reacted so harshly, I know there's probably a lot of technical washout in there, but is there anything you would have or could have done differently looking back?
Yeah, I don't think so, Greg. I think we've had a lot of intensive interaction with the market over the past few weeks, as you can imagine. We haven't heard any concerns or questions or issues that have shaken our faith in the deal. We're still convinced this is absolutely the right deal and the right time to do it. I do think that there's been a lot of technical pressure on the stock for the reasons you mentioned, plus maybe some others, which is not unexpected. We're in this unique time period where people need time and access to information to make the fundamental buy decision. We've got some technical pressure causing selling, but people need time and information to make the fundamental buying decisions.
We've been doing a lot of these conferences, getting out in front of investors along with the Windstream management team and getting more information out there. Of course, the proxy is going to be filed in a couple of months. I think people are waiting for that, and we're excited to get that out there. There's a lot of really interesting background reading that you'll find in there. We're not swayed by the reaction in the stock. In fact, I think what we're hearing is universal support for the recombination, just a lot of questions about the mechanics and the underlying fundamentals.
I think once people really start to focus on the fundamentals, which is combining Windstream's wholesale business with our very successful wholesale fiber strategy, I mean, that's going to continue to be a mid-single-digit growing business going forward, and recombining Kinetic, OpCo, and PropCo. You're going to have a terrific fiber-to-the-home copper fiber conversion story, both of those businesses targeting tier two and tier three enterprise, residential, and wholesale markets. Very unique strategy, very unique story on a combined basis. That business is going to grow at the low to mid-single digits, top line, low to mid-single digits, EBITDA growth. Margins are going to level out in the mid-40% range, and capital intensity is going to level out in the 15%-20% range. Again, Greg, you know those are all the metrics that are very similar to what we've been saying at Uniti for many years.
We think the businesses fit great together. The strategy is going to be unique. Ultimately, we also are going to have a lot of strategic optionality on bringing those assets together. I think once people have time to really focus on the fundamentals, they're going to start to see the merits of it.
All right. A lot to unpack there that we'll hopefully get to.
Sorry.
But we did also want to talk about the timing of the deal. Why now? As you consider, on one side, it makes sense because interest rates have finally sort of stabilized this year after last year. This sort of went up and to the right and didn't know where it would end up. And one could argue you could have get Windstream cheaper later if you waited, but at the same time, it's sort of a chicken and the egg because then your stock would get impacted too. So maybe with all that said, why was the timing right today?
Yeah. Look, I think, again, when the proxy comes out, you'll see a lot of background information. We've been very active behind the scenes on strategic options, most of which were presented to us as opposed to the other way around. So we were very reactive over the past few years. I think Windstream was too. And for Uniti, we were focused on the balance sheet, focused on pushing out maturities. We were in a challenging interest rate environment, as you know. And so up until the beginning of 2023, we were really focused on that first in addition to execution. But once we got all the maturities pushed out, we even messaged publicly that we were starting to turn back to M&A on a proactive basis. And so that's really what led to us initiating conversations with the Windstream shareholders from just a timing perspective for us.
We were able to be proactive versus reactive. Secondly, I think BEAD is a once-in-a-lifetime opportunity for fiber-to-the-home providers, including and especially those providers that have those tier two and tier three and tier four footprints like Kinetic does. So we believe that on a combined basis, the company has a much better opportunity there than if we were separate. We don't want to miss that window. Thirdly, I think that my view is that in the next 18-24 months, there's going to be a consolidation wave in fiber, both commercial fiber and fiber-to-the-home. I don't want to miss that window. I think on a combined basis, this company has an opportunity to participate in that wave in a way that the two companies separately could not. On the concept of whether it gets cheaper or more expensive, hard to say, right?
I just think based on what I just said, the window was right, and we think we hit it.
That's good insights. Maybe talk about why this deal. Over the last few years, we've read plenty of unsubstantiated media reports, whether it was Zayo, DigitalBridge, EQT. What made this deal the most optimal one out of the potential options that had been reported?
Yeah. Again, the proxy is going to have a lot of really interesting background reading. So I won't comment on rumors. But we had the opportunity to assess a lot of different options. And one of the things that we've come to understand is there is a lot of strategic interest and financial interest in our assets and Windstream's assets, including on a combined basis. We also found a lot of validating valuation markers on those assets over the past couple, three years. We also found that as separate companies getting to a deal and an optimal deal was challenging. The structure historically provided challenges. And so when we assessed all those options and looked at all what we consider to be intrinsic value of these assets, including on a combined basis, our view was this deal is the best deal because we're able to bring the assets together.
And then we can go assess strategic optionality from a position of strength with all of the assets under one umbrella as opposed to trying to do piecemeal type deals. In addition to the fact, like I said at the beginning, there's a ton of industrial logic to combining these businesses. And so on a go-forward basis, M&A is an option, but it's not a requirement because I think this business is a unique asset from an operating point of view and a strategic positioning point of view. And we've got questions about the consideration mix, why cash, why preferred, why equity. We really tried to solve for three things. One, setting up the balance sheet for success at the beginning. And I hope we talk about leverage today because that's a question that we get. So setting up the balance sheet for success.
two, getting alignment of interest with the selling shareholders. We've always used equity in our M&A deals, as you know, Greg, in the past. So we like having that alignment of interest. Thirdly, trying to minimize dilution to our shareholders because we really think that this business today on a pro forma basis, given where the stock trades, is basically valued at 6x, which we think is really, really ridiculously low. We think it's worth 8x, 9x, 10x. So we wanted to minimize dilution, give our shareholders the opportunity to benefit in that upside. So when we put all those things together, that consideration mix is where we landed. Ultimately, we think that's the right place to be.
Right. And you alluded to the valuation. And can you maybe help me with the mechanics of your valuation? For example, if I applied a 4-5 multiple on the copper and Kinetic, an 8-10 on the fiber to the home, eight on the fiber, I'm just making this up illustration for the eight on managed services, take out the net debt, and I put a public to private discount on it, divide by shares. Is that the right way of thinking about it? Is there any landmines, anything I'm not thinking of?
No, no. I think we've gotten asked the question a lot, how do we think about value? And look, personally, I'm a large shareholder in the company. I'm a top 10 or 15 shareholder in the company. And so I think about value all the time, all day long, all the time. And number one, I think historically, Uniti has had a challenge getting the market to value the MLA revenue appropriately. It's perpetually been discounted in our view, despite 10 years of lease payments, never a missed lease payment. So my view, simply speaking, is you're replacing that MLA revenue with fiber revenue. And we know how to run a fiber business. We know how to get sweat fiber assets.
So my view is we're going to be able to get a premium multiple on that fiber revenue, whether it be fiber to the home or commercial, versus the MLA revenue. Secondly, to your point, and Bill, let's pull up the slide. We put out some new slides this morning, which we think are responsive to some of the questions that we've been getting. And Greg, spot on. I mean, when we think about value, we do think about it on a sum of the parts basis. And you look at the multiples that we're applying here, you can't ignore ABS financings that are happening in the fiber to the home space and the commercial fiber space. You're getting 9.5x-10x leverage on these assets, never mind the valuation. And in the private market, we're still seeing these 10x-20x multiples on fiber businesses.
So when you weigh sort of weighted average on these assets, including with the DSL, you're getting to 8x multiple plus today. And as we transition more and more of that Kinetic footprint to fiber over time, that multiple starts to appreciate. So when we look at the valuations today, again, the ones that are implied today based upon the technical selling, there's almost no way to get to the 6x or roughly 6x multiple that we're trading at. So I think we're excited about this page and what it implies for the value of these assets.
Right. And that was my next question, I guess, is what you think would make the stock work because you guys are the ones who structured the deal. So you have an opinion there. But the slides that you put up this morning, specifically slides 6-9, show you sort of longer-term targets. So I guess not only just showing how you think about the valuation. And secondly, if you can execute on these longer-term targets that you have on there, you put ink on paper, I guess. And if you can execute on that, maybe that will help the stock market set the right rate.
Yeah. Listen, I think we've got to be able to give investors information. They need information. They need access to us. They need access to Windstream. So that's part of the plan. That's one of the initiatives over the next 12 months. Secondly, we've got to execute, right? We're going to continue to execute at Uniti. We're going to continue to put up those very predictable results. I think there's going to continue to be good, solid execution at Kinetic. And so people are going to continue to see those solid performances. Thirdly, we need to put in place an integration plan, which we are in the process of doing, and we're going to begin executing on. Fourthly, we need to refine the expanded build plan. We've talked about expanding the Kinetic build to up to 1 million homes. And the BEAD process is part of that.
But I think all of these things are things that we need to be able to show the market and investors that we're making progress during this sign-to-close period. And fourthly, we've already initiated a strategic review of the assets from some of the parts standpoint. But we've got to show progress. We've got to show execution. And ultimately, I think as people start to do their fundamental work, they get access to the proxy. I think that's what's going to help make the stock work, us getting out there and being responsive to investor questions.
How should we think about leverage, as you mentioned earlier? Where do you think the leverage will be coming out of the deal, and where do you see it going, and when will it be in deleverage mode?
So leverage was a very important topic when we were negotiating the deal because the selling shareholders, a couple of the largest Windstream shareholders, are really rolling all of their economic value into this deal. They're taking out virtually no cash. And so we were all incentivized and motivated to have the right opening leverage and liquidity profile. And it was very important to us that we have a fully funded business plan. And so that's important. I'll come back to leverage. But right now, our business plan is fully funded, including with the expanded build. Because if you use the BEAD program, as we're anticipating, a lot of that BEAD funding is front-end loaded, and the matching portion comes later. And so when you roll all of that in, this business becomes really generating cash flow in 2026, 2027, and beyond.
The cash flow from the business funds that expanded build. We've got the liquidity on hand today to fund the cash burn in 2024 and 2025.
Right. So the existing Windstream subscribers today that are fiberized generate the EBITDA by 2027 with the BEAD upfront money. It's a flywheel that gets funded for the additional 1 million homes that you guys are looking for.
That's correct. That's correct. The Uniti business is going to continue, CapEx is going to continue to come down. So very predictable business, very stable business. That's one of the things that was important to us because we have a stable business. Windstream's Kinetic is stable. Even Windstream's managed services business, which is declining top line, has flattest EBITDA and virtually no capital. So it's a business that we think is relatively easy to plan from a liquidity point of view. Leverage at the outset is high. It's 4.8x before the preferred. We think it's going to tick a little bit over 5x with the build as we go through the next couple of years on the build. But then it comes down and levels out around 4.5x.
We have another slide that we put out this morning that shows kind of the longer-term outlook of this business. You can see the mid-single digit growth that I talked about, low to mid-single digit growth that I talked about, capital intensity leveling out after the build, and leverage leveling out around 4.5 times, and continues to tick down beyond that based upon EBITDA growth and just debt paydown if we choose to.
Got it. And then synergies as well. We haven't really talked about that yet. But I think you spoke of $100 million in OpEx synergies. Can you just give us some color on where exactly these synergies are coming from? What type of access costs? I can imagine you're saving some Type 2 costs by riding Windstream's network, and they're saving on your side, things like that.
That is by far the biggest part of it, Greg. You're right.
In which way is it? Is it the Windstream riding on yours, or you're riding?
So most of Windstream's footprint is off-net. They are procuring fiber from third-party providers and using that in their CLEC. So a big synergy of this deal is to bring that on-net and bring that onto the Uniti network. So they obviously use the Uniti network today, but there's probably 60%-70% of that business that's off-net. So that 60%-70% is right for the taking. So we're going to be grooming that traffic onto our network. And that's a big part of that synergy number. There's also some foregone CapEx because, as you know, Uniti has been progressively lighting more and more inner-city routes to get into the wavelengths market. And Windstream already has a lit network. So we're going to be able to forego some CapEx there.
That really supercharges our inner-city wavelengths business, which is very important today, given where we are with hyperscalers, by the way.
Sure. We'll get to talk about that.
There's some corporate redundancies and some systems redundancies. The majority of those savings are coming on the network side.
So you're eliminating a lot of these Type 2 access costs. I'm trying to think of the timing of this $100 million in synergy. I think you mentioned three years. But is it front-end loaded, back-end loaded, linear? Can you help us out with that?
I would say we are modeling it as linear. When you're grooming off-net traffic to on-net, there's a schedule. You kind of know when these IRUs mature. So we've got the schedule laid out already. I'd think about it as linear.
Okay. And sort of last question on the deal specifics is that you're no longer going to be a REIT. You're going to de-REIT, if you will, and become a C-Corp. You might leave a subsidiary as a REIT, I think. So help us through how that looks, and help us through the process of de-REITing over the next year as it pertains to the dividend, etc.
Yeah. So we've declared a dividend, and we're paying a dividend shortly. And that should be our last cash distribution because with that dividend, we'll be overdistributed for 2024 from a cash flow perspective. The deal should close in 2025. And so by the deal itself, that will result in a distribution that satisfies any required REIT distributions for 2025. And so by the end of the tax year, 2025, we will no longer file as a REIT at the corporate level. And ironically, by de-REITing, we're actually saving more corporate taxes with the step-up because the step-up.
Asset step-up.
Asset step-up as a sale of the REIT gives us the ability to really forgo most corporate taxes on a go-forward basis. But to your point, all of that, Greg, will happen over the course of the next 12 months as we lead up to closing. And then at closing, we'll effectively be de-REITing at the corporate level. But we do think and work is ongoing. But we do think retaining REIT status, at least at one of the Uniti subsidiary levels, will be useful, not only from the standpoint of foregoing or benefiting from the interest deduction associated with taxable income, but also just the strategic optionality of having that REIT status. It's pretty valuable to have that at a fiber company.
Pretty hard to become a REIT, so.
It's very hard to become a REIT, especially as a fiber company. And so with respect to strategic and M&A flexibility on a go-for basis, we really want to retain that.
That's a good segue to my next question. You mentioned strategic review is ongoing as one of the major initiatives going forward. I'd be remiss not to mention Crown Castle's fiber business in the market. I think it'd be too large, obviously, for Uniti to take on. But could you partner? Could it be broken into pieces? I mean, Elliott seems to be everywhere in the equation. So I guess the question is, could you consider options with Crown Castle? Or do you feel like your hands are too full today?
Our hands are definitely not too full. Like I said at the outset, part of the rationale for the combination now is to put ourselves in a position to participate in what we think is an M&A or fiber consolidation wave that's ongoing and coming, 1. 2, I don't want to comment on anything specific. But the proxy reading will be interesting. The background reading will be interesting. I think there's a number of very interesting and valuable assets out there that could fit with some very strategic assets that we currently own at Uniti and on a combined basis that this business will own.
Right. I look forward to figuring out Company A, B, C, and D in the proxy when it comes out. But on that note, talk about the rationale for this M&A wave that you foresee or you prognosticate. Why do you think it's happening now? And is it this AI-driven wave? Or is it the capital markets behaving? What do you think would be the reason?
Yeah. Look, I think, first of all, the interest in fiber assets has ebbed and flowed over the years. But one thing that's held constant through that is quality fiber assets continue to get premium multiples. And to us, fiber-to-the-home is a business model that's working. The jury is still out for some. But I think, for the most part, when you look at the business models, both the public and the private ones, they're working. And you look at two weeks ago, T-Mobile made a large investment in an incumbent fiber-to-the-home provider. Okay. That's what Lumos was. That's what Kinetic is. And I don't need to tell you the multiple that was put on that asset, very valuable asset. So you have some really strategic parties coming into the space, looking for an opportunity to get into the space.
They're looking for scaled assets. Scale really matters in fiber, including and especially fiber-to-the-home. So the scale benefits are one of the things that's going to be driving it. Secondly, you've got new participants that are looking for either platforms or to grow their existing platforms. And thirdly, when you go back over the past number of years, the infrastructure funds that have invested in fiber, whether it's commercial fiber or fiber-to-the-home, you're starting to get to that 3-, 4-, or 5-year window when they start to look for exits. And so when you put those things together, along with what we think is an improving debt market from a rate perspective, at some point, hopefully this year, soon, you're going to start to see an improving rate environment. I think all those things together lead to M&A.
Yeah. And you wonder if those infrastructure funds, as they sunset their horizons, are recycling the data center world with AI and everything as well.
Probably.
Maybe we can talk about that in terms of AI demand. It's red hot in the data center world. It seems like fiber is now catching some of the AI demand in the AI narrative. You've noted over the past few earnings calls and, sure enough, you mentioned you had a big deal in Huntsville, Alabama, which I believe was AI-driven. Can you help us articulate where the demand is coming from specifically and the opportunity for Uniti? Is it waves to connect training data centers? Is it dark fiber? Is it conduit sales? Is it all the above? I'm just trying to figure out where the specific demand is coming from.
Yeah. It's really all the above. I think, so we're selling wavelengths. We're selling dark fiber. We're building new fiber for hyperscalers. We're selling existing fiber. So the deal you mentioned, for example, in the first quarter was building new routes connecting tier 2, tier 3 markets in our existing footprint for data center connectivity. And the hyperscalers need massive amounts of data center capacity. And one of the constraints in the bigger markets is power. And so they're looking in these tier 2 and 3 markets where their grids are not nearly as stressed, which means new data centers, which anytime you hear the hyperscalers talking about data centers, you should also think about them needing fiber and large amounts of fiber to connect those data centers.
That deal in the first quarter was to connect new data centers in tier 2 markets in our footprint. In the second quarter, we're going to have a really large bookings quarter. A lot of that's going to be driven by selling existing capacity to hyperscalers. In some cases, it's WAVES. In some cases, it's dark fiber on existing fiber connecting markets as well. Some of the hyperscalers are building for the future. They're telling us that they're buying for what they need for the next 4, 5, 6 years. Others are buying for the immediate, the next 12 months, next 18 months. It's hard to put them into one category in terms of what they're doing. I think they're all looking at it a little bit differently.
But the amount of demand that is currently forecasted for AI is a multiple of what we expected for 5G, for example. And so when I look at our funnel and the amount of opportunities that we have there, which is the precursor to bookings, right? I mean, that's, in some cases, more important than bookings. The funnel is what you're really working on. It's bigger than it's ever been. And the hyperscalers are a bigger component of it than wireless ever was in the past as a data point.
That's, I guess, my next and, I guess, last question as we're running out of time: do you expect this to be a super cycle? Because you're mentioning some of your customers are saying 4 and 5 or 6-year plans. And some of them are looking more short-term. And I guess the bearish argument would be that if it's just 20 data centers across the country, training data centers, maybe the inference data centers have plenty of network, you stitch these data centers together. But after that, it's sort of one-time in nature then as you've connected them, and that's sort of it? Or is it a super cycle?
I don't want to use the word super cycle because that sounds but I think it's probably closer to that than one-time in nature because, like I said, some of our customers are planning for the next 6 months and 12 months, which leads me to think that there's a lot more investment beyond that. Some are planning for the longer term. And the amount of capacity that they're procuring leads me to think that they believe there is a tremendous amount of demand coming. And so I've seen what data point do you want to pick? Is it capacity at data centers? Is it fiber capacity? Or is it revenue that you think is going to be driven by AI? And all of them are these hockey stick forecasts.
What's important to me is I look at what the hyperscalers say they're spending from a CapEx point of view. It's analogous to all of us following the wireless carriers closely and what they say they're going to spend. They're all talking about spending billions of dollars to position for AI. I don't think that's a one-time and done thing. I think it's here to stay.
Great.