July 29, 2014 / 5:25 PM / 3 years ago

UPDATE 1-US telecom shares rise after Windstream gets REIT approval

(Adds details, background, analyst comment; updates shares)

By Supantha Mukherjee and Marina Lopes

July 29 (Reuters) - Shares of U.S. telecom companies rose after network operator Windstream Holdings Inc received regulatory approval to convert some assets into a real estate investment trust - a tax-efficient structure that could be adopted by others.

Windstream’s shares jumped as much as 26 percent to their highest in more than two years.

The stock topped the broader S&P telecoms sector index , which was up 3 percent by midday. CenturyLink Inc shares were up 8 percent, AT&T Inc was up 3 percent and Verizon Communication Inc rose 2 percent.

Windstream said on Tuesday it received a favorable ruling from the Internal Revenue Service (IRS), allowing it to spin off its fiber and copper network and other fixed real estate assets into a REIT.

“Given the IRS approval, we expect other companies may explore the possibility of spinning off their Wireline assets into a similar structure,” Jefferies & Co analysts said.

REITs are not required to pay corporate tax but must distribute at least 90 percent of their taxable income among shareholders via dividends, making them attractive for investors.

To qualify as a REIT, a business must have at least 75 percent of its holdings in real estate assets and must get approvals from shareholders, the U.S. Securities and Exchange Commission and the IRS.

Telecom companies own large real estate assets in the form of fiber networks, towers and data centers. Windstream, whose fiber network spans about 118,000 miles, has 27 data centers that offer managed services and cloud computing.

Telecom tower companies such as American Tower Corp, which holds substantial real estate, have already converted into REITs.

Some analysts, however, said a REIT conversion might not benefit the major wireless companies as they already rent their infrastructure to third parties and have minimized their tax liabilities.

AT&T and Verizon have not consistently paid material cash income taxes to benefit from the REIT tax reduction, said Craig Moffett, chief analyst at MoffetNathanson.

“It appears to us that this morning’s stock reactions are indiscriminate, at best,” Moffett said in a note.

Windstream’s REIT will list separately and pay an annual dividend equivalent to 60 cents per share, after a tax-free spinoff, the company said.

The company said the REIT would raise about $3.5 billion in new debt, which would be used to retire Windstream’s $3.2 billion of debt.

The company said it plans to pay $650 million annually in rent to the REIT.

Windstream’s shares were up about 14 percent at $11.99 in afternoon trading. More than 88 million shares had changed hands, 16 times the stock’s 10-day average.

The proposed spinoff also boosted shares of other network operators - Comcast and Time Warner Cable were up more than 2 percent each. (Editing by Saumyadeb Chakrabarty)

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