U.S. Service Providers Spin off Assets as the Core Business Shifts

Brian Washburn
Brian Washburn

Summary Bullets:

• AT&T, Verizon, Windstream and MegaPath all share asset divestments in their recent history, shedding non-core assets through outright sales or moving them to OpEx.

• Over the long term, market forces can conceivably push asset buyers and asset sellers to evolve in different directions.

Earlier in February, Verizon reached agreements for two major sales: a roughly $10.5 billion divestment of incumbent local GTE telephone properties, and a $5 billion long-term lease/manage/purchase arrangement for its 11,300 wireless towers (see “Frontier Lands the Rest of Former GTE Telephone as Verizon Cuts Deals to Raise $15 Billion,” Feb. 9, 2015). The wireless tower long-term lease details resemble a similar arrangement AT&T reached with Crown Castle in October 2013.

When it comes to asset restructuring, there’s more going on. U.S. data center providers have been converting to real estate investment trusts (REITs) because of their more favorable tax status. Equinix, for example, switched over to the model at the end of 2014. But Windstream has successfully navigated creating a REIT for its network assets (e.g., central offices, fiber/copper networks and poles). It will split the company, creating a separate REIT holding these assets (see “Windstream Completes Integration Tasks, Moves into Position in Enterprise Market,” December 23, 2014). Windstream will retain an exclusive master lease agreement even as it can spin debt off to the spin-off asset holder, called “Communications Sales & Leasing”.

Yet another example is MegaPath’s divesting its former Covad colocations (and corresponding wholesale customers) for an undisclosed amount to Global Capacity, which closed in January 2015 (see “MegaPath Exits Wholesale Business with Sale to Global Capacity,” Sept. 10, 2014). Investor Pivotal Group, which owns Global Capacity, is a self-described specialist in real estate.

For its part, AT&T closed the sale of its Connecticut local wireline footprint to Frontier for $2 billion in late 2014. But also, rumors swirled in early February that AT&T was negotiating a $2 billion dollar long-term exclusive lease arrangement to divest some of its data centers, presumably to lease them as an exclusive tenant.

The math might differ from one case to the next. But the underlying thread suggests operators are coming under the same pressures that enterprises have been grappling with over the last several years. They are trying to decide what sunk assets are critical for the business to own outright, and what non-critical assets they can offload to operational expenditure (OpEx). Thus, they can disaggregate the actual steel towers from the wireless network; separate voice and data services from the underlying central offices and cabling; and make data center building ownership a separate business model, and separate function, from operating cloud and managed services housed within.

There’s just one catch to all this asset divestment, of course. History shows that different companies, each under pressure to succeed, can end up going in two different directions. AT&T, Verizon, Windstream, and MegaPath – each may have airtight contracts protecting their rights to tap assets divested to partners. But in the end, they can’t fully control what innovations their asset-holding partners might develop over time, or other deals their partners might have to make some day to maximize their own profitability.

What do you think?

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