- Potential valuation increase from creating pure play, high yield REIT; high dividends very attractive to income investors.
- Pure play wireless and transmission company can command higher multiple, less CapEx burden.
- AT&T's balance sheet would be strengthened by spinning off infrastructure assets.
This morning, Windstream (NASDAQ:WIN), in an announcement that is potentially significant for AT&T (NYSE:T), Sprint (NYSE:S) and Verizon (NYSE:VZ), announced the tax-free spinoff of certain network assets in a real estate investment trust [REIT]. This transaction was validated by a private letter ruling from the IRS; the IRS understands that the ruling will potentially be used by comparable companies, like T, with comparable assets. Basically, the underlying logic of the spin-off is to take assets that are highly certain in their cash flow and create a NewCo that will hold these assets. The NewCo can than contract with the old parent (and potentially other firms) for their use. Owners of the NewCo get a stable dividend payment, which is highly attractive to income-oriented investors. For T, this provides a great opportunity to unleash value to its shareholders by spinning off network assets into a NewCo and having the parent lease them back. Investors who value income can keep the NewCo and get, presumably, a yield higher than T's dividend; investors who value T's core business can keep the "legacy" entity and share in any appreciation from the core business (with likely a more modest dividend). T would also benefit by strengthening its balance sheet from the sale of the contributed assets. In Wall Street speak, you are creating a "pure play," as investors generally prefer focused investments which tend to command a valuation premium. In T's case, you have the potential of a pure-play REIT (presuming it unlocks value like WIN just did) and a (more) pure play investment in wireless and TV transmission and content (assuming the DTV transaction is approved).
This transaction was not anticipated in my prior articles, "AT&T: A Junk Bond in Equity Clothing" and "Update: AT&T Earnings - Biggest Growth? CapEx." If T is able to unlock value, it is a really exciting opportunity for shareholders to have value unlocked.
As this news is not directly about T, I cannot predict if it will follow. However, as I believe it highlights the potential for T, I am more positive about the stock for both income-oriented investors and total return investors. However, it T jumps today, the security may already reflect the value (or a portion of the value) of this new information (efficient market theory).
Disclaimer: This article reflects the personal opinions of the author and should not be relied upon or used as a basis in making an investment decision. Investors should always do their own due diligence prior to making an investment decision.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in T, VZ over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.