July 29, 2014 6:01 pm

Windstream soars on Reit spin-off plan

The US telecoms sector climbed on Tuesday after a small wireline network announced plans to spin off part of its business into a real estate investment trust, establishing a new way for rivals to derive value from assets.

Windstream, based in Little Rock, Arkansas, said it would turn its existing fibre and copper network, as well as other fixed real estate assets, into a publicly traded Reit, allowing the new company to avoid federal income taxes.

The approach has been tried by cellular tower operators like American Tower, but not by a larger cable or fibre optic network owner.

Windstream said its board of directors had received a favourable private letter ruling from the Internal Revenue Service, although it will still require regulatory approval.

“Given the IRS approval, we expect other companies may explore the possibility of spinning off their wireline assets into a similar structure,” Mike McCormack, an analyst with Jefferies, said.

Analysts with Credit Suisse said AT&T and Verizon were likely evaluating a similar strategy, but would “have the advantage of waiting to see how the Windstream transition plays out”.

The conversion to a Reit comes as many companies, particularly those in the pharmaceutical sector, evaluate means to reduce taxes. Several, including AbbVie, are hoping to redomicile overseas to reduce their tax bill.

The news sent shares of S&P 500 listed telecom operators broadly higher. Windstream soared 12 per cent to $11.83, AT&T rose 3 per cent to $36.59, Verizon advanced 1 per cent to $51.97 and Telephone & Data Systems increased 5 per cent to $25.92.

UPS was under pressure after the company, which together with FedEx and Deutsche Post’s DHL dominates the business of shipping parcels around the world, cut its profit forecast for the year as it invests in its business.

The company said it would expand operations on the day after Thanksgiving in the US as part of a $175m increase in operating expenses. UPS executives hope to avoid a surge in demand last year that left it incapable of meeting delivery targets.

Earnings per share will now be between $4.90 and $5.00 this year, UPS said, compared to a previous forecast of $5.05 to $5.30 a share.

Shares of UPS are among the worst performing on the Dow Jones transport index this year. The company declined 4 per cent on Tuesday to $98.86 while rival FedEx dropped 2 per cent to $147.14.

A 17 per cent slide in second-quarter profits and tepid third-quarter earnings guidance from Herbalife sent its shares 14 per cent lower to $58.35.

Net income at the nutrition supplement company declined to $120m, or $1.31 per share, shy of Wall Street expectations. Sales climbed 7 per cent from a year earlier to $1.3bn.

Herbalife has sought to keep shareholders on board amid its battle with Mr Ackman, the founder of the Pershing Square hedge fund who claims the company is a pyramid scheme.

The company, which denies Mr Ackman’s allegations, accelerated its $1.5bn share buyback plan earlier this year.

Both the US Department of Justice and the Federal Bureau of Investigation have launched a probe into the allegations.

Darden shares rose 4 per cent to $46.88 after the company said Clarence Otis, who has served as Darden’s chief executive for nearly a decade, would step down at the end of the year amid an ongoing tussle with activist investor Starboard Value.

The shake-up within Darden’s executive suite came as the company entered settlement discussions with Starboard regarding the firm’s proxy contest.

Darden, which owns the Olive Garden and Longhorn Steakhouse chains, said it would trim the list of nominees to its board of directors to ensure at least three Starboard nominees are elected at the company’s annual general meeting in September.

Overall, US equity markets trended lower despite rising consumer confidence figures. The S&P 500 fell 0.5 per cent to 1,969.95 while the Dow Jones Industrial Average declined 0.4 per cent to 16,912.11. The Nasdaq Composite fell 0.1 per cent to 4,442.70.

eric.platt@ft.com

Twitter: @ericgplatt

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