Citigroup Says A Restructuring At Windstream Can Create A 'Win-Win' For Shareholders

In a report published Thursday, Citigroup analyst Michael Rollins said that Windstream Holdings, Inc.'s (NASDAQ: WIN) upcoming financial restructuring can support a higher valuation."

Rollins stated that shares have underperformed due to a combination of disappointing sales, margin pressure and an "underwhelming" 2015 guidance and high debt leverage, despite plans to initiate a financial restructuring.

However, Rollins noted that a successful restructuring plan can create a "Win-Win" for shareholders via: 1) demand for dividend yield; 2) room for an OpCo/PropCo structure that can yield to outperformance; and 3) positive valuation prospects.

"We previously thought the PropCo, now known as 'CS&L', would trade at a dividend yield of 8 percent to 10 percent," Rollins wrote. "After further study, we now believe the PropCo's leasing income over its initial 15-year term should show greater resilience in possible financial distress scenarios than the interest payments on the OpCo's subordinated debt."

Rollins explained, "With the OpCo's long-dated subordinated debt trading at a yield-to-worst between 8.0 percent and 8.5 percent, we now think the new PropCo can reach a base case dividend yield of 7.5 percent."

Bottom line, Rollins argued that there is an opportunity for enterprise value to grow and for new broadband investments to help slow the erosion within its consumer and small business segments.

Shares were upgraded to "Buy/High Risk" from "Neutral/High Risk" with a price target raised to $9 from a previous $8.