Windstream plans fourth phone carrier deal; Peet's unlikely to bid higher for Diedrich Coffee

By Cristal Cody

Tupelo, Miss., Nov. 24 - Windstream Corp. said Tuesday it will acquire Iowa Telecommunications Services, Inc. for $1.1 billion - its fourth acquisition this year.

The buying spree cements the growing consolidation for rural local exchange carriers, an analyst said Tuesday.

In other situations, a battle for control of Diedrich Coffee, Inc. grew with another counter bid by Green Mountain Coffee Roasters, Inc., which bested the offer from Peet's Coffee & Tea, Inc.

But Green Mountain's new bid of $265 million in cash already represents an expensive deal that's not expected to increase much more, an analyst told Prospect News on Tuesday.

Meanwhile on Wall Street, stocks ended a short rally.

The Dow Jones Industrial Average lost 17.24 points, or 0.16%, to close at 10,433.71 on Tuesday.

The Standard & Poor's 500 index inched down 0.59 of a point, or 0.05%, to 1,105.54, and the Nasdaq Composite index slipped 6.83 points, or 0.31%, to 2,169.18.

Windstream on buying spree

Little Rock, Ark.-based Windstream said it will acquire Iowa Telecommunications for $7.90 in cash and 0.804 of a share for each Iowa Telecommunications share.

Windstream said it expects to pay about $261 million in cash and issue 26.5 million shares of stock valued at $269 million as well as repay Iowa Telecommunications' estimated net debt of about $598 million.

The offer values Iowa Telecommunications shares at $16.04, a 26% premium to Monday's closing stock price.

"As the telecommunications industry changes, it has become clear that we need to increase the size and scale of our operations in order to continue to offer our customers the services they need," Alan L. Wells, Iowa Telecom's chairman and chief executive officer, said in a statement. "This has been a difficult decision, but we firmly believe that the combination with Windstream is in the best interest of our company, our customers and our shareholders."

The transaction is expected to close in mid-2010, subject to approvals from federal and state regulators and Iowa Telecommunications shareholders.

Windstream spokesman David Avery told Prospect News on Tuesday that the acquisition will require approvals from the Federal Communications Commission as well as the Iowa Utilities Board, Minnesota Public Utilities Commission, Missouri Public Service Commission and Nebraska Public Service Commission.

Christopher Larsen, an analyst with Piper Jaffray & Co., said Tuesday in a research note released to Prospect News that the acquisition is "yet another example of consolidation amongst the RLECs."

Earlier this month, Windstream said it will purchase business phone company NuVox Inc. for $643 million in cash and stock, and it closed on the takeover of rural phone carrier D&E Communications, Inc. of Pennsylvania for $159 million in cash and stock.

Windstream also announced in September it would acquire North Carolina-based Lexcom Inc. for $141 million.

The risks to the takeover of Iowa Telecommunications include that "Windstream could do dilutive acquisitions," Larsen said.

Jeff Gardner, president and CEO of Windstream, defended the acquisitions in a statement.

"Windstream has extensive experience with successfully integrating new properties. The transactions we have announced this year are scheduled to close in an orderly fashion over a period of time providing the opportunity for very manageable integrations," he said. "Each of these companies is extremely well run, and we are very far along in our integration planning."

Windstream, which provides phone, internet and digital TV services in 16 states, said the acquisition of Iowa Telecommunications should provide about $35 million in annual expense and capital savings.

Iowa Telecommunications, based in Newton, Iowa, provides phone services to residential and business customers in Iowa and Minnesota.

"These are well-run, profitable properties in very rural service areas that expand our presence in the Upper Midwest and grow our free cash flow per share," Gardner said.

Windstream intends to finance the cash portion of the deal and the repayment of Iowa Telecom's outstanding debt with proceeds from a debt financing or additional bank loans.

Shares of Iowa Telecommunications gained $3.31, or 26.08%, to close at $16.00 on Tuesday. The stock has traded from $9.94 to $16.45 over the past year.

Windstream's stock fell 5 cents, or 0.49%, to $10.08.

Single-serve prompts coffee battle

On Tuesday, Peet's Coffee & Tea said it was informed a day earlier by Diedrich of Green Mountain's increased bid of $32.00 a share in cash.

Peet's also had offered $32.00 a share in cash and stock, with $19.80 in cash and 0.321 of a share for each share of Diedrich.

"Diedrich indicated to us that its board of directors required additional time to analyze the proposal relative to Peet's combined cash-and-stock proposal currently valued at $30.41 per share based on Peet's closing price yesterday of $33.06," Patrick O'Dea, Peet's president & CEO, said in a statement on Tuesday. "We appreciate the need to fully understand all elements and implications of both proposals and believe our current proposal to be superior given the greater certainty of an expeditious closing and the potential upside for Diedrich's shareholders through the Peet's stock component."

Diedrich's board had agreed on Nov. 2 to sell the company to Peet's for $26.00 a share in cash and stock. Green Mountain countered the bid with an offer for $30.00 a share in cash, which prompted an increased cash-and-stock bid from Peet's.

Peet's, an Emeryville, Calif.-based specialty coffee and tea company, said it plans to finance the cash portion with cash on hand from both companies and $140 million of committed debt financing from Wells Fargo Bank, NA and Wells Fargo Securities, LLC.

An analyst told Prospect News on Tuesday that Peet's probably can't continue bidding up much more.

"It depends on how much they can take up in the debt portion because they don't have very much cash on their balance sheet," the analyst said. "It doesn't seem like they could take up too much more with the cash component. It's always going to be less than what Green Mountain can offer because of the cash component. As it stands, it looks like Green Mountain has the superior bid on the table."

The deal already is "very rich," the analyst said. "Right now the deal is worth 14.3 times EBITDA. I wouldn't think it would go much more than 15 times."

Green Mountain said in a statement Tuesday that its new offer of $265 million in cash provides greater certainty since Peet's offer is subject to fluctuations of market price.

"We remain firmly committed to this strategic combination with Diedrich," Lawrence J. Blanford, Green Mountain's president and CEO, said in the statement. "This transaction will build upon the success of GMCR's family of brands across North America and further advance GMCR's objective of becoming a leader in the highly fragmented and competitive coffee and coffee maker businesses."

Waterbury, Vt.-based Green Mountain Coffee's licensed products include Newman's Own Organics coffee and gourmet single-serve Keurig brewing systems.

Irvine, Calif.-based Diedrich's operates Gloria Jean's Coffees and the K-Cup single-serve coffee business.

Green Mountain reported to analysts that sales of its K-Cup by unit volume were projected to grow from 1.6 billion cups sold in 2009 to between 2.67 billion and 2.85 billion cups sold in 2010, the analyst said Tuesday.

The ultimate deal price "gets into the realm of just how fast this K-Cup is going to be growing," the source said.

Diedrich shares rose 26 cents, or 0.77%, to $33.91.

Peet's stock slipped 20 cents, or 0.60%, to $32.86.

Green Mountain shares dropped $1.48, or 2.26%, to close Tuesday at $63.96.

Mentioned in this article:

Diedrich Coffee, Inc. Nasdaq: DDRX

Green Mountain Coffee Roasters, Inc. Nasdaq: GMCR

Iowa Telecommunications Services, Inc. NYSE: IWA

Peet's Coffee & Tea, Inc. Nasdaq: PEET

Windstream Corp. NYSE: WIN

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