This is a fascinating time for the shareholders of Uniti Group (UNIT). Concerned about what will happen to society now that its biggest client (and former parent) Windstream Holdings (WIN) has lost a major legal battle with the Aurelius hedge fund that could lead to Windstream's eventual bankruptcy, so investors should expect extreme volatility. At the moment, it is imperative that management act under the most bearish assumptions so that, in cases where Uniti's situation deteriorates, the company is in the best position possible. Management has just indicated that (investors would have reason to hope) will lead the company to optimize its assets and focus more on accretive cash flow growth.
A look at the news
February 19 was a terrible day for Uniti shareholders. More than 37% of the fiber / telecom REIT's shares were closed for fear that a negative Windstream decision (which would have fallen by more than 61%) would cause severe suffering for Uniti. Previously, I wrote on the subject, explaining to investors how and why Windstream had lost and offering a range of scenarios that could crumble. The worst of these scenarios would be a complete bankruptcy of the business that would result either in a dissolution of the company and / or in a decision of the new owners not to stick to Uniti as a telecommunications asset provider. According to a better and probably more likely scenario (windstream bankruptcy or not), Uniti would be forced to be breathtaking on what it charges Windstream for using its assets each year.
In response to these concerns, the Uniti management team announced on February 19 that the company was confident that its lease agreement with Windstream would remain in effect. In their statement, the company assured investors that it was not part of the dispute and that Windstream needed its assets if the company wanted to maintain its business. He also said that Windstream intended to continue to wage this legal battle, leaving hope that an appeal could overturn the decision.
While Uniti's statement may appease the minds of some investors, the action speaks a million times stronger and only this action allows the firm to position itself better to prepare for the worst. To do this, the best solution is to sell the non-performing assets and use the cash proceeds from those sales to reinvest in profitable parts of the business so as to diversify Uniti from its Windstream exposure. After all, in the first three quarters of fiscal 2018, 69.6% of its revenue and 85.7% (excluding business) of its EBITDA came from activities with Windstream.
Fortunately, the first major step in this direction seems positive for shareholders. According to management, the company has an agreement with a company controlled by Phoenix Tower International under which Uniti will sell the entire Towers business in Latin America to the company. These are telecommunication towers scattered throughout Mexico, Colombia and Nicaragua.
It's a good move on the part of the management
Unlike most companies, where sub-segment data is not always available in the amount desired by analysts, data provided by Uniti about its operations in Latin America is very comprehensive. On January 31, 2017, the company acquired a company called NMS (Network Management Holdings), a company that held at that time 366 towers spread throughout Latin America. 212 of them were located in Mexico, 54 in Nicaragua and 100 others in Colombia. The price paid by management for these assets was $ 62.6 million.
In addition to the existing units, another 105 were under construction and management committed to acquire them as they were completed. At the time of finalization of the acquisition of NMS, it had risen to 50 rounds, for which Uniti paid $ 5.1 million, or about $ 102,000 each. In the third quarter of last year, 16 developing towers were canceled and 89 were completed, but that's not all, it would cost only 455 laps. At the end of the third quarter of last year, the tower counted Latin America came to 495, the management declaring in its current press release that it sells about 500 laps.
If we take the amount of 500 turns that management gives us, assume that the price paid for NMS was correct (management being unable to extract additional value from these assets before selling them), and that we rely on the the price of $ 102,000 per lap up to $ 500, the total investment by Uniti in Latin America is expected to be $ 76.27 million. This transaction represents a significant gain for Uniti, which has agreed to sell these 500 laps in exchange for $ 100 million, providing shareholders with a significant short-term gain.
The gain on this sale is nice to see, but this article would not be worth publishing if it was all there was because, compared to Uniti as a whole, the gain realized is small. What is important, however, is that not only does management reverse these assets, it also unloads a company that, frankly, has been losing since its acquisition. In the first three quarters of last year, sales of its towers in Latin America reached $ 7.06 million, or 69.4% of the company's turnover for towers.
Although EBITDA data are not broken down between the operations of its Latin America and US towers, the sector as a whole during this nine-month period generated negative EBITDA of $ 0.42 million. $. On an annualized basis, we can conclude that the Company's operations in Latin America are expected to generate revenues of approximately $ 9.4 million and EBITDA of approximately $ 0.39 million.
This is, in essence, not only an unprofitable business sector for Uniti, but also a sector so small and likely to have as little growth potential in relation to the growth required to seize the real opportunities as investors would be right to describe as distraction. This is all the more true if one considers the risks that the company is currently facing because of Windstream. Management may be able to better utilize capital for its Fiber Infrastructure segment, which includes cellular backhaul services and dark fiber services.
In the first three quarters of last year, Uniti Fiber generated revenue of $ 204.49 million and EBITDA of $ 87.08 million, representing an EBITDA margin of 42.6% . An even better option would be to continue investing in the leasing activities in which Windstream is involved, with the goal of acquiring new customers. After all, this sector managed to generate 99.7% EBITDA margin on sales of $ 521.48 million. Any expansion on this front likely to diversify away from Windstream would therefore be useful.
To take away
On the basis of the data provided, it is clear that Uniti is struggling, but this latest initiative of management leaves me at least thinking that the company is flexible and understands that taking a good pay today and putting the money back on the table. money to the company are for better. As long as we continue to see such movements, I think that all is not lost, but that to truly isolate itself, the activity will probably require additional efforts to diversify away from Windstream. As long as this diversification is not complete and / or we do not know what the legal implications for Windstream will be, this will result in some degree of speculation, but any action will be preferable to management.
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Disclosure: I / we have / we have no position in the actions mentioned, and we do not intend to initiate a position within the next 72 hours. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.