Completion of Merger (Notes)

3 Months Ended

Mar. 31, 2017

Business Combination Disclosure [Text Block]

Completion of Merger:

On February 27, 2017, Windstream Holdings completed its merger with EarthLink Holdings Corp. (“EarthLink”), pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”) dated November 5, 2016, whereby EarthLink merged into Europa Merger Sub, Inc., an wholly-owned subsidiary of Windstream Services, LLC, and survived, and immediately following, merged with Europa Merger Sub, LLC, a wholly-owned subsidiary of Windstream Services, LLC, with Merger Sub surviving and changing its name to EarthLink Holdings, LLC (the “Merger”). EarthLink Holdings, LLC is a direct, wholly-owned subsidiary of Windstream Services and provides data, voice and managed network services to retail and wholesale business customers and nationwide Internet access and related value-added services to residential customers. In the Merger, we added approximately 700,000 customers and approximately 16,000 incremental route fiber miles, which expanded our national footprint to approximately 147,000 fiber route miles and enhanced our ability to offer customers expanded products, services and enhanced enterprise solutions. We also expect to achieve operating expense and capital expenditure synergies in integrating the acquired operations. Pursuant to the terms of the Merger Agreement, each share of EarthLink common stock was exchanged for .818 of Windstream Holdings common stock. No fractional shares were issued in the Merger, with a cash payment being made in lieu of fractional shares. Employee restricted stock units issued by EarthLink that were outstanding as of the merger date were exchanged for an equivalent number of Windstream Holdings restricted stock units based on the same exchange ratio of EarthLink common stock to Windstream Holdings common stock of .818 per share. The replacement restricted stock units remain subject to the vesting and other terms and conditions prescribed by the EarthLink equity plans that were assumed by us in the Merger. In the aggregate, Windstream Holdings issued 87.8 million shares of its common stock and 5.2 million of replacement equity awards. Windstream also assumed $435.3 million aggregate principal amount of EarthLink’s long-term debt, which we refinanced, as further discussed in Note 4. The Merger qualifies as a tax-free reorganization for U.S. federal income tax purposes and is valued at approximately $1.1 billion.

2. Completion of Merger, Continued:

We accounted for the Merger using the acquisition method of accounting and accordingly, the cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the merger date. The allocation of the purchase price is preliminary and subject to change based on the finalization of the third-party appraisals and obtaining information currently not available to us, primarily related to the tax basis of assets acquired. Any changes to the initial estimates of the fair value of the acquired assets and liabilities assumed will be recorded as adjustments to those asset and liabilities with the offset charged to goodwill. Goodwill associated with the Merger was primarily attributable to the EarthLink workforce and expected synergies. Approximately $54.8 million of goodwill associated with the acquisition of EarthLink is expected to be deductible for income tax purposes.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed for EarthLink.



(Millions)	Preliminary Allocation
Fair value of assets acquired:
Cash and other current assets	$	37.7
Accounts receivable	75.3
Property, plant and equipment	344.0
Goodwill	476.6
Customer lists (a)	275.0
Trade name, developed technology and software (b)	31.0
Other assets	0.3
Total assets acquired	1,239.9
Fair value of liabilities assumed:
Current liabilities	119.5
Long-term debt	449.1
Other liabilities	24.4
Total liabilities assumed	593.0
Common stock and replacement equity awards issued to EarthLink shareholders (c)	$	646.9


(a)	Customer lists are amortized using the sum-of-years digit methodology over a weighted average life of 5.5 years.


(b)	Trade name is amortized on a straight-line basis over an estimated useful life of 7 years. Internally developed technology and software are amortized on a straight-line basis over an estimated useful life of 3 years.


(c)	Total merger consideration of $646.9 million consisted of $631.4 million related to shares issued to EarthLink shareholders and $15.5 million related to replacement equity awards.

The preliminary fair values of the assets acquired and liabilities assumed were determined with the assistance of a third-party valuation firm using income, cost, and market approaches. The customer lists were valued based on the present value of future cash flows and the trade name was valued using the relief-from-royalty method, both of which are income approaches. Significant assumptions utilized in the income approach were based on our specific information and projections, which are not observable in the market and are thus considered Level 3 measurements as defined by authoritative guidance. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used as appropriate for valuing internally developed technology and software and property, plant and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation. The fair value of the EarthLink credit facility was based on its redemption cost, while the remaining bonds were valued based on quoted market prices. Equity consideration was based on the opening price of our common stock on February 27, 2017. Consideration related to replacement restricted stock units was calculated based on the opening price of our common stock on February 27, 2017, net of the portion of the fair value attributable to future vesting requirements. The amount allocated to unearned compensation cost for awards subject to future service requirements was calculated based on the fair value of such awards at the acquisition date and will be recognized as compensation cost over the remaining future service period. The preliminary allocation of the purchase price, including the allocation of purchase price to acquired net operating losses, resulted in an estimated net deferred tax asset which was fully offset by a valuation allowance. We expect to adjust this preliminary net deferred tax asset and valuation allowance upon finalization of the third party-appraisal and upon receipt of additional information not currently available to us.

2. Completion of Merger, Continued:

The results of EarthLink’s operations are included in our consolidated results of operations beginning on February 27, 2017. For the three months ended March 31, 2017, our consolidated results of operations include revenues and sales of $82.1 million and an operating loss of $2.8 million attributable to EarthLink. We incurred $53.1 million of merger and integration expenses during the first quarter of 2017 related to the completion of the Merger (see Note 9).

The following unaudited pro forma consolidated results of operations of Windstream for the three months ended March 31, 2017 and 2016 assume that the Merger occurred as of January 1, 2016:



	Three Months Ended March 31,
(Millions)	2017			2016
Revenues and sales	$	1,515.2		$	1,631.5
Operating income	$	96.8		$	92.5
Net loss	$	(82.3	)	$	(270.6	)
Loss per share		($.45	)		($1.53	)

The pro forma information presents our historical results of operations adjusted to include EarthLink, with the results prior to the merger closing date adjusted to include the pro forma effect of the elimination of transactions between Windstream and EarthLink, the adjustment to revenues and sales to change EarthLink’s reporting of USF fees billed to customers and the related payments from a net basis to a gross basis to conform to Windstream’s reporting of such customer billings, the adjustment to depreciation and amortization expense associated with the estimated acquired fair value of property, plant and equipment and intangible assets, the adjustment to interest expense to reflect the refinancing of EarthLink’s long-term debt obligations, the impact of merger and integration expenses related to the acquisition and the related income tax effects of the pro forma adjustments. The pro forma amounts for the three months ended March 31, 2017 and 2016 also include the effects of non-acquisition-related items, as more fully discussed in Notes 9 and 10.

The pro forma results are presented for illustrative purposes only and do not reflect either the realization of potential cost savings or any related integration costs. These pro forma results do not purport to be indicative of the results that would have been obtained if the Merger had occurred as of the date indicated, nor do the pro forma results intend to be a projection of results that may be obtained in the future.

- Definition

The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable).

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+ Details

WINDSTREAM SERVICES, LLC 10-Q