At last week’s Citi EMT conference, international telecommunications carrier glbc gave an upbeat presentation where they reiterated the favorable market conditions they see for their products even in this ugly recession. But perhaps most interesting were the comments of CEO John Legere about consolidation in the sector, which were unusually frank and very much on the mark. Here is a quick transcription of what he said:
It’s painfully clear that Global Crossing, either as a part of somebody else’s business or a couple or 3 or 4 pieces of the puzzle that still sit out there, have such huge synergies that … this consolidation should take place. And I think a number of us have been anticipating it for years.
This echos what I have thought and said for a long time. You see, as well as Global Crossing has done with their assets, that asset base is incomplete and that limits their future. That is why such great synergies exist for the right purchaser of the company, and they clearly know it. The company is a puzzle piece looking for a home. Perhaps it used to be covered in mud and was unwanted by all, but now it’s reasonably clean and shiny and it clearly belongs somewhere. Yet it still cannot happen, as Legere explains:
Clearly this is not the environment … where that is either going to happen or going to happen easily. But you’ve got a dichotomy, that two players, or two versions of two or three where the synergies are somewhere between $250M and $500M a year. So you tend to in the short term value these platforms as if you can attain those synergies and we’ve proved we know how to get them. Yet you’ve got capital markets basically closed, you’ve got covenants that would require in certain transactions for you to refinance your debt but you can’t. And you’ve got significantly undervalued equities that are almost impossible to use. So it’s going to be a long road, creative minds will try to find a shareholder friendly way for these to take place but the synergies are tremendous.
So we have a situation where consolidation needs to happen, wants to happen, should happen. There are huge benefits available to such a transaction. But it still can’t happen because of the credit crisis. Legere talks about $250M-500M annual savings depending on the combination, and I completely agree with him. The best fits come down to metro coverage, and GLBC+TWTC and GLBC+LVLT both could find synergies in the upper end of that range if they could only find the necessary backing to do a deal. And we know that Icahn bid for Global Crossing years ago to combine with XO Holdings (news, filings), which makes as much sense now as it did then. For now though, that’s just the way it is. Unless of course an 800lb gorilla (Buffett? Carlos Slim?) decides to enable it of course.
The one deal that looks easiest to make, however, is for Global Crossing itself to buy some metro facilities, in my opinion of course the best target for Global Crossing is abvt because there is no debt to refinance and thus access to the credit markets is less of an issue.
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Categories: Internet Backbones · Mergers and Acquisitions · Metro fiber
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Great article Rob.
His comments here & previous comments correcting an article in the NY Times indicate [to me] clearly that GLBC is for sale .
The current economic situation as stated above virtually prohibits a deal—but there is another problem .
It appears that GLBC wants to be paid for synergies achieved by others . If GLBC has 350 mil in ebitda or whatever yardstick one wishes to choose , that should be the key to price . It very much sounds as if GLBC want’s to be paid based on the benefit a 3rd party will derive .
The problem here is that the 3rd party has invested & built a network for the purpose of being able to produce results that are superior to GLBC’s , now GLBC seems to be saying indirectly] we are entitled to a piece of those benefits .
If I were a buyer I would not be willing to pay GLBC based on synergies . No portion of those benefits belong to GLBC .
I would point out that GLBC has been claiming substantial rev growth , I imagine this is part of their strategy for selling the co . However, examining their Q3 results indicates that the majority of that rev growth came in its ROW division [I believe it was 9 mil] . If memory serves that division had 289 mil in rev—with the magnificent total of 7 mil in EBITDA . Their big rev growth comes from an area where they do not make money .
Their recent acquisition Impsat [south america] produced 40 mil of the 88 mil ebitda reported for Q3 . Much of the increase in Impsat ebitda came from cost cutting .
My point is that GLBC is a dressed up turkey—all the bows & ribbons are hiding the fact that they do not have a great future . I would hate to see them be paid for deceptive growth or synergies attained by a 3rd party .