Uniti Group announced today a strategic operating company / property company (OpCo-PropCo) fiber transaction worth $206m with Everstream Solutions. Everstream is majority owned by AMP Capital, an infrastructure fund based in Sydney, Australia.
Lease Agreement with Everstream
As part of the transaction, Uniti Group will enter into two 20-year Indefeasible Right of Use (IRU) lease agreements with Everstream on Uniti-owned fiber. Everstream also has the option for two 10-year renewals at fair market value.
Specifically, the leased assets cover over 10k fiber route miles and 220k fiber strand miles. Of the total 220k fiber strand miles, the assets include 165k fiber strand miles which Uniti acquired rights to as part of its settlement with Windstream (through which it acquired 2.2 million fiber strand miles). Additionally, the fiber is located in 8 states throughout the Northeast and Midwest, United States.
Sale of Fiber Assets to Everstream
Concurrently, Uniti Group has agreed to sell to Everstream a portion of Uniti Fiber’s Northeast operations and certain dark fiber IRU contracts, acquired as part of the Windstream settlement. In aggregate, these fiber assets generate ~$24m of annual revenue. Specifically, Uniti Fiber’s Northeast Operations currently generate ~$20m of annual revenue. While the dark fiber IRU contracts currently generate ~$4m of annual revenue.
Total cash consideration to Uniti Group, including upfront IRU payments, is $135m. Specifically, Uniti Fiber’s Northeast operations comprised $62m of this cash consideration and the dark fiber IRU contract comprised $73m of this cash consideration.
In addition to the upfront proceeds, Uniti will receive fees of ~$3m annually from Everstream over the initial 20-year term of the IRU lease agreements. This lease payment will also have annual rental escalators of 2%. Therefore, the transaction value of this 20-year lease IRU lease agreement with Everstream, equates to ~$71m. In turn, the overall transaction value with Everstream increases to ~$206m ($135m + $71m).
Finally, the transaction is expected to close in April 2021.
Transaction Rationale – for Uniti Group
The Everstream fiber transaction, highlights several key themes for Uniti Group:
The transaction results in a total increased contract value to Uniti Group of ~$107m. Contract value represents Uniti’s contracted monthly recurring revenue (MRR) multiplied by the term of its contracts, in months. Further, Uniti is replacing actively managed lit services revenue with passively managed dark fiber revenue.
Uniti Group is able to extend the duration of its portfolio, overall, given the 20-year term remaining on the Everstream IRUs versus ~4.3-years for existing contracts sold. Specifically, this helps to eliminate any churn risk on these fiber assets. Additionally, this deal represents a material lease-up transaction on the recently acquired Windstream settlement fiber and highlights the strategic value of this network to Uniti.
Financially, EBITDA margins are close to 100% on the Everstream IRU agreements, as compared to ~73% EBITDA margins on the contracts sold to Everstream. Furthermore, the transaction proceeds allow Uniti to reduce its capital requirements at its Uniti Fiber segment into 2021.
Credit Rating Upgrades – of Uniti Group
During Q3 2020, Moody’s and S&P upgraded Uniti’s rating to B3 from Caa2 and B- from CCC, respectively. These upgrades reflected the improved financial flexibility of Windstream, following its emergence from bankruptcy. Additionally, these credit rating upgrades follow Fitch’s earlier upgrade of Uniti’s rating to B+ from CCC.
Uniti remains optimistic that its credit rating will further improve during 2021, allowing for an improved cost of capital that will make future M&A deals increasingly likely. Specifically, Uniti Group foresees further OpCo-PropCo deals as a possibility, similar to the Everstream fiber deal.