Windstream (s WIN), a Little Rock, Ark.-based phone and broadband company says it is buying PAETEC Holding Company (s PAET) of Fairport, N.Y. for $2.3 billion. Upon closing this deal, Windstream will have a bigger national footprint with a bigger fiber network to service the lucrative business customers.

From the Windstream press release:

• PAETEC shareholders will receive 0.460 shares of Windstream common stock for each PAETEC share owned under the terms of the agreement which was approved by the boards of directors of both companies.
• Windstream expects to issue approximately 73 million shares of stock valued at approximately $891 million, based on the company’s closing stock price on July 29, 2011.
• Windstream also will assume or refinance PAETEC’s net debt of approximately $1.4 billion at the time of closing.
• PAETEC stockholders are expected to own approximately 13 percent of the combined company upon closing of the transaction.
• The combined company would have had $6.1 billion in total revenue and about $2.4 billion in adjusted operating income.

Stifel Nicolaus telecom analyst Christopher King writes in a note emailed to his clients this morning:

Windstream will experience a slight increase in leverage temporarily, excluding the synergies expected, as leverage would increase to 3.7x on an LTM basis, however the company expects the acquisition to lower its dividend payout ratio, and improve its growth profile, with roughly 70% of total consolidated pro forma revenues coming from business and broadband segments–and roughly 63% from business alone.

PAETEC’s 7 data centers would be combined with Windstream’s current 13 data centers, to offer widespread coverage across the eastern half of the country, with a national 100,000-mile fiber network.

While the modest increase in leverage somewhat concerns us in the near term, those fears are more than offset by the synergy opportunities, as well as the NOL tax benefits, with management expecting to use approximately $130 million in NOLs in each of the next 5 years.

PAETEC deal is a way for Windstream to add heft to its CLEC ambitions. It has previously bought Nuvox and KDL, but those were small deals compared to this deal as it catapults the company as a player alongside the big boys. Rob Powell of Telecom Ramblings blog writes:

Add all of them up and the CLEC business will contribute as much as 70% of Windstream’s $6B in run-rate annual revenue. The company’s enterprise business overall will clearly be their primary focus from here on out, and they obviously haven’t run into any big problems being both an ILEC and a CLEC thus far. The fiber assets are quite complimentary, as the KDL assets fit right in the middle of the Intellifiber assets on the east coast and in the rust belt and plus the former McLeodUSA fiber further out in the Midwest, while reaching southward.