Little Rock, Ark.-based Windstream, the second largest and most rural independent operating company in the country, said last week it will acquire CT Communications in the second half of 2007 for approximately $585 million. Although this is the first acquisition for Windstream since starting life last July through the simultaneous separation from Alltel and acquisition of Valor Communications, it is only a continuation of a serious roll-up of access lines in the independent telco market.

For Windstream, CT presented a particularly strategic opportunity uncommon in the far-flung reaches and rural properties. CT's territory in North Carolina is adjacent to properties Windstream already owns in that market. Windstream will add another 158,000 access lines and 29,000 broadband subscribers through the acquisition, but it also eliminates a competitor, gets a newly upgraded network that covers 95% of its territory with 10 Mb/s broadband service and doubles its size in that market.

Windstream is shooting for approximately $30 million worth of synergies through the acquisition, coming mostly from the typical areas of administration, sales and marketing, and engineering. The company realized $52 million in synergies from the acquisition of Valor, which was more than twice the size of CT.

“Not only do I believe we can add value by improving that business over time, but by acquiring that business, we will improve our existing operations in North Carolina,” said Jeff Gardner, president and CEO of Windstream.

As acquisitions go, this one wasn't huge. Gardner said it was more strategic due to its proximity to Windstream's existing market. It also included CT's wireless business, which will require more strategic thinking as Windstream has opted out of the wireless business elsewhere.

“We do know we can significantly improve the cash flow generation of these [wireless] assets,” Gardner said. “But we also have some ‘optionality’ should we conclude it makes more sense for someone else to own the asset. You could always monetize it.”

Rob West, senior vice president of the communications division for CoBank, a lender and financier to rural telcos and other markets, said it was a good buy. “It's a great asset for the current shareholders, and that is proven out by the price Windstream paid,” he said. “There is a lot of high quality there. We'll see if they can extract it. They have a good management team at Windstream, and odds are in their favor of doing so.”

Windstream will pay a 31% premium over CT's previous 30-day trading average and is shooting for about $30 million worth of synergies.

Despite two acquisitions in one year, people don't see Windstream as an aggressive consolidator, including Gardner who said, “We are not singly focused on M&A. Our primary focus is on improving the organic run rate in our business.”

West agreed. “I don't think they have a huge appetite for taking people over,” he said. “I think they will selectively find opportunities. This acquisition, for example, may not be a once-in-a-lifetime deal, but you don't want to let good properties get away.

Ken Pyle, co-founder of Viodi, said that perhaps there was more to the acquisition than strategic adjacencies and potential synergies. “Maybe Windstream wanted to get the property before someone else did. Maybe they were just being proactive.”

Considering all the M&A activity in this space over the last two years, he may have a point — especially after Hargray Communications Group in neighboring Hilton Head, S.C., said in April it had agreed to be acquired by Quadrangle Capital Partners.

Bernie Arnason, partner with Pivot Group, said the rise in M&A activity shows “people are seeing the benefits of getting bigger and growing scale.” Most activity, however, has been around flagship-type properties, he said. This leaves the smaller players in the lurch.

“We will continue to see activity among the mid-range and larger players, but I look at the smaller guys and wonder where they fit in this equation,” Arnason said.

It's unclear whether small players even want to be part of this activity, but Arnason said investors continue to nose around this space. “Maybe they're just waiting to see how all the regulatory issues play out. When, or if, those get settled, that might spur some movement there.”

He said investors looking at small telephone companies for long-term investment want more clarity around the regulatory process. “Small telcos, previous to all this regulatory uncertainty, were not a bad investment. They had a guaranteed rate of return, and they were pretty stable,” Arnason said. “Some of them are still pretty attractive if they continue to get the regulatory treatment they have been getting.”

West also thinks small telcos can be a good investment. “The economics are just not there for others to come in and compete with them. Who wants to put networks in place in those large geographic areas?” he said. “They should be able to maintain customers and, because of cost recovery mechanisms, the phone guys have better plant by a long shot, and that creates a barrier to entry.”

West also said M&A activity in general is for continuing to upgrade network assets and penetrating markets more thoroughly. “Sometimes when you have been the owner for a long time, you struggle with making those network investment decisions,” West said. “But when new owners come in, they get more aggressive. They see the opportunity more readily and are willing to spend money in the plant to upgrade it.”

Garner said small companies will have to decide if they want to go it alone or become part of a bigger enterprise. “Overall, the environment is good for more consolidation in our space,” he said, “and that's what we anticipated when we put this company together.”