Hey, Brother, What Do We Do About Windstream's Deal With Uniti?

(Bloomberg) -- Windstream Holdings Corp.’s ill-fated spinoff of Uniti Group Inc. may put brothers who are senior executives at each company on opposite sides of a tussle over payments worth billions of dollars.

Robert Gunderman is chief financial officer of bankrupt Windstream, and his brother Kenneth “Kenny” Gunderman is chief executive at Uniti, a post he’s held since Uniti’s 2015 spinoff from Windstream. Before that, Kenny was co-head of investment banking at Stephens Inc., which earned more than $1 million on work for Windstream, according to a 2014 filing. Robert was Windstream’s treasurer back then, and the company said he wasn’t responsible for choosing Stephens.

Windstream’s Feb. 25 bankruptcy filing opens up all its finances and contracts to revisions, and Windstream is Uniti’s single biggest customer. This could mean rejection or renegotiation of Windstream’s agreement to lease Uniti assets well into the next decade for more than $650 million a year. Windstream’s lawyer, Stephen Hessler, told the bankruptcy court Tuesday the lease will be reviewed.

“That’s where the fact that the CFO of Windstream is the brother of the CEO of Uniti is funny,” said Jared Ellias, an associate professor of bankruptcy law at the University of California Hastings who foresees some difficult negotiations. “The general rule is that a debtor in Chapter 11 has the power to get out of contracts.”

Full Disclosure

The Gunderman family ties were fully outlined to investors in multiple documents before Uniti’s spinoff. The subject came up briefly last year in a deposition by Robert Gunderman for a trial that led to the Feb. 15 default ruling and Windstream’s bankruptcy; there were no suggestions of improper conduct. The executive ultimately in charge of Windstream’s fate is Chief Executive Officer Tony Thomas.

“The relationship between Windstream’s CFO, Bob Gunderman, and Uniti’s CEO, Kenneth Gunderman, has been publicly disclosed in our company’s proxy since 2015,” the company said in an e-mailed statement. The Gundermans didn’t respond to messages sent to company representatives. Uniti also didn’t respond to messages but said in a statement that Windstream “intends to pay vendors in full for all goods received and services provided to Windstream after the filing date.”

While each Gunderman is obligated to stick up for their stakeholders, there’s plenty of reason for them to cooperate. Windstream leases Uniti’s fiber and copper networks to serve its 1.4 million consumers and small businesses in 18 states, and Uniti gets more than two-thirds of its revenue from the deal. With that in mind, analysts don’t expect the companies to sever their relationship entirely.

Common Ground

“Windstream needs the network,” said Cowen Inc. analyst Greg Williams. “Uniti needs a tenant.”

Windstream’s woes stem from a spinoff announced in July 2014 that ultimately caused its plunge into bankruptcy. The plan called for transferring assets that included miles of copper wire and fiber optic cables into a real estate investment trust, and then leasing them back for about $650 million a year. The point was to cut debt and boost free cash flow, Windstream told investors.

The spinoff into what became Uniti was completed in April 2015 without objection from debt holders until 2017, when Aurelius Capital Management claimed the sale and leaseback violated bond covenants. Judge Jesse Furman ruled Feb. 15 in favor of Aurelius, and awarded the hedge fund $310 million. Windstream’s bankruptcy followed on Feb. 25, putting the lease in play.

Landlines Lag

Cuts might be in order because the lease is outdated, said Williams at Cowen. Telephone landline use is eroding and the services are worth less than they were in 2015, Williams said, estimating the payment could be cut by more than 20 percent.

Windstream gets to make the first move by drafting a reorganization plan, Williams told clients in a note. At least initially, Uniti management will be “resolute” about preserving the rent payments, he wrote; the key unknown is how hard Windstream creditors will press for cuts.

Windstream said via email it’s “considering all potential alternatives to maximize value for its stakeholders, maintain sufficient liquidity, and preserve the company’s long-term potential.”

Ethics Policy

Family relations are addressed in Windstream’s company ethics policy, which generally prohibits business dealings with family members and “in some instances, it may also be a conflict of interest if a member of your immediate family is employed by a supplier, contractor or competitor of Windstream.” The policy says its human resources department can approve arrangements under “exceptional circumstances.”

The company said in an October 2014 filing, when Robert Gunderman was senior vice president and treasurer, that he wasn’t responsible for hiring Stephens, the investment bank where Kenny Gunderman worked before Windstream tapped him to lead Uniti. Robert handled capital budgeting, forecasting, treasury and capital market functions, debt management, investor relations and risk management, according to the filing.

The idea for the spinoff didn’t come from Stephens, Robert Gunderman said in a November 2017 deposition. Bank of America Corp. approached Windstream in 2013 with the idea of creating a REIT, JPMorgan Chase & Co. was brought in to help, “and Stephens was a financial adviser advising on any number of portions of the transaction,” he testified. Kenny Gunderman was Stephens’ lead adviser to Windstream during that time, Robert testified.

Robert Gunderman relied on internal and external advisers for his understanding of the covenants regarding sale and leaseback like the one being crafted with Uniti, according to his testimony.

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