Leading rural telecom carrier Windstream Corporation (WIN) reported that it will continue with acquisitions to expand its business. The company may buy smaller telephone operators and broadband Internet service providers to expand operational scale, subscriber base and product/service range.

Windstream is on an acquisition binge as the carrier has spent more than $2.2 billion so far in the current year. The company recently purchased privately held small carrier Lexcom for $143 million in cash. Windstream also acquired Pennsylvania-based rural phone and Internet service operator D&E Communications (DECC) for $333 million in Nov 2009.

Windstream is also set to buy privately held regional competitive local exchange carrier NuVox (for roughly $643 million) to boost its high-speed Internet business. Moreover, the company recently announced that it will buy small local exchange carrier Iowa Telecommunication Services (IWA) for approximately $1.1 billion (including $598 million of Iowa debt).

Windstream faces a steady decline in its fixed-line phone business, given the rapid customer migration to cellular services and the sluggish economic condition (as customers are “cutting the wire” to save money). The company is facing stiff competition from Tier-1 wireless carriers such as Verizon (VZ) and AT&T (T) as well as VoIP (Internet phone) services from cable operators. Sustained access line erosion continues to weigh on Windstream’s top-line.

While Windstream’s acquisition strategy is vital for its survival in a consolidating industry, we remain concerned about its highly leveraged balance sheet as the company is funding most of the acquisitions with debt.

Windstream raised $400 million in unsecured debt in Sep 2009 to finance the D&E and Lexcom acquisitions. The company currently has just $290 million in cash and roughly $5.3 billion in total debt, which aggravate our concern.

Zacks Investment Research

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