2nd UPDATE: Windstream To Buy NuVox; Rural Telco M&A Continues

Phone company Windstream Corp. (WIN) said Tuesday it agreed to acquire NuVox Inc. for $463 million, another illustration of rural telecommunications providers scooping up smaller players to stay competitive with their cable rivals.

Since May, Windstream has agreed to buy three smaller rural telcos in deals with a combined value of more than $760 million, or more than a billion when factoring the debt. For privately held NuVox, Windstream will pay $280 million in cash and issue $183 million in stock, while assuming $180 million in debt. The company plans to use its existing cash and tap its revolving credit line to fund the deal.

Windstream and other rural telcos are scrambling to buy up each other to boost their size, allowing them to pass their sizeable capital expenditures and operating expenses across a wider base of customers and territories. The increased scale allows them to bargain for better deals for telco gear. The industry continues to face pressure as cable providers poach customers with their own rival phone services, while other consumers cancel their lines to go solely with the cellphones. As such, Windstream Chief Executive Jeff Gardner told Dow Jones Newswires he expects consolidation to continue in the industry.

Tuesday's deal for NuVox also brings a sizeable business presence for Windstream.

"We've been talking about focusing on the business and broadband space," Gardner said. "After the deal, over 50% of our mix will be in business and broadband. That goes a long way towards our strategy."

The deal, which is expected to close in the first half of next year, is expected to save $30 million in annual operating expenses and capital expenditures, the company said. It is also expected to add free cash flow in the first full year of combined operation, as well as lower the company's dividend payout ratio. The boards of both companies have approved the deal.

NuVox brings to the table operations in 16 states and roughly 90,000 business customers. Windstream operates in 16 states and boasts 3 million access lines.

"Windstream is paying the same for a dying [rural phone company], but getting a business with potential secular growth in the future," said D.A. Davidson analyst Donna Jaegers.

In May, Windstream entered into an agreement to buy D&E Communications Inc. (DECC) for $159 million in cash and stock, in addition to absorbing $171 million in debt. In September, the company agreed to buy Lexcom Inc. (LXCM) for $141 million in cash.

Despite the number of pending deals, Gardner said he wasn't concerned about any integration hiccups.

"This team has done a lot of deals," he said. "We've got a great history."

Windstream shares were down 0.8% to $9.71 early Tuesday.

Windstream isn't the only telco in the M&A game. Frontier Communications Corp. (FTR), is in the middle of acquiring a swath non-essential wireline assets from Verizon Communications Inc. (VZ).

Earlier Tuesday, Frontier reported third-quarter net income of $52.2 million, or 17 cents a share, up from a year-earlier profit of $47 million, or 15 cents a share. Results included a one-cent charge related to acquisition costs.

Revenue, however, fell 6% to $526.8 million on continued access line declines.

Wall Street, on average, estimated earnings of 13 cents a share on $530 million in revenue.

"Despite a slight margin improvement, overall, results were generally disappointing," said J.P. Morgan analyst Mike McCormack.

Frontier shares recently were down 1.5% at $7.16.

There remains some concern over whether the telcos will be able to handle the added debt related to these deals after Fairpoint Communications Inc. (FRCMQ) filed for bankruptcy protection. The company was saddled with overwhelming debt after buying Verizon's New England wireline assets early last year.

Gardner, however, said the company's debt ratio actually improves after the NuVox deal.

"We're in a great shape from a balance sheet perspective," he said.

-By Roger Cheng, Dow Jones Newswires; 212-416-2153; roger.cheng@dowjones.com

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