UPDATE 3-Tower operator Uniti to merge with Windstream a decade after split

(Rewrites throughout to adds details on earnings and proposed merger, updates shares)

May 3 (Reuters) - Uniti Group will merge with telecom services provider Windstream almost a decade after their separation to better compete in the fiber network market in rural America, the wireless tower owner said on Friday.

The combined company, which will be based in Little Rock, Arkansas, will have more than 1.1 million customers with a strong presence in Midwest and Southeast United States.

Shares of Uniti tumbled nearly 18% in early trading, as the proposed deal offers Windstream shareholders $425 million in cash, $575 million of preferred equity and a 38% stake in the combined company. Uniti shareholders will own the rest.

Uniti expects to fund the cash component from operations, borrowings and capital market transactions.

Windstream had spun off Uniti in 2015 to reduce its debt by $3.2 billion and increase free cash flow.

Four years later, the telecom company filed for bankruptcy after a court ruling against the spinoff said Windstream violated agreements with its bondholders. It emerged from bankruptcy in September 2020.

"As a combined company, we will continue our disciplined growth trajectory while expanding FTTH (fiber-to-the-home) build-outs and significantly improving our overall financial profile," said Uniti CEO Kenny Gunderman.

Some of Windstream's largest shareholders including activist investor Elliott Investment Management, which is also a holder of Uniti's equity and debt, will be rolling substantially all of their investment value in Windstream into the combined company.

The merger is expected to close in the second half of 2025.

Uniti operates as a real estate investment trust, which owns wireless towers and controls the broadband network. It counts Windstream as its largest customer.

Also on Friday, Uniti reported its first-quarter revenue was down 1.1% from the year earlier at $286.4 million. Reported funds from operations — a key measure of cash flow — came in at 29 cents per share, compared with 15 cents a year ago. (Reporting by Zaheer Kachwala in Bengaluru; Editing by Shilpi Majumdar)