Wow! I now hereby take the possible sale of the q longhaul network seriously. Why? Well, unlike all other such M&A rumors over the last year, this time the buzz generated was incredible – Telecom Ramblings had its biggest traffic day ever, and the audience came largely from within the industry itself. That doesn’t mean it is true obviously, but it does mean that a heck of a lot of people who may know things are taking it seriously, so I will too. So today let’s look at a few other details.
Revenues: On GigaOm they have been throwing around $3.27B as the 2008 revenues for the Qwest longhaul network. Now, they might have gotten this from Qwest I guess, and it could be right. But it looks suspiciously like the $3.27B in ‘Wholesale’ revenues from the 10-K SEC filing. This would be incorrect, Qwest does not segregate its longhaul revenues this way – they are spread between the wholesale and enterprise segments and are largely dominated by in-region revenues. The Wholesale segment, for instance, includes revenues generated in-region from UNE circuits as well as wholesale voice termination in their capacity as an ILEC. On the other hand, part of Qwest’s enterprise revenues would need to be included, but it isn’t clear which of those belong to the ILEC portion and which with the longhaul portion.
As far as I can tell, there is no published data available that can tell us just what Qwest might be looking to sell. There are many ways to package it, and perhaps it would to a great extent depend upon the buyer. Does it include wholesale voice revenues? Or are we talking mainly about fiber, transport, and IP? Using the latter assumption, I had put the revenues at under $2B – if it includes wholesale voice and approaches $3B it makes the price more reasonable although adding the voice component would lower the margins the division might have. Does anyone have further information about what assets they are really shopping?
Alternative scenarios:
- Sprint? I understand the fit between the assets on an intellectual basis, but Sprint just isn’t in a position right now to manage such an integration, let alone raise $2-3B to buy it.
- Cavtel or Zayo? Or a whole host of other dynamic smaller players? For $2-3B in an environment where money is this expensive, it’s far out of range for anybody that doesn’t have revenues in the billions. At least, it would take levels of financial creativity beyond my ken to pull it off.
- Qwest becoming an RLEC consolidator after selling the longhaul network? I’m not sure their balance sheet will be quite strong enough to pull that off, but it is possible I guess. The market will probably not care much by then however.
- Qwest selling the ILEC rather than longhaul? Anything’s possible I guess, but since Verizon and AT&T don’t seem to want those rural access lines, and since private equity is currently rather unlikely, who would buy it? CenturyTel and Embarq are busy, and I don’t think Frontier can pull off one that big, can it? And it doesn’t solve Qwest longhaul’s structural weaknesses, i.e. insufficient on-ramps outside their home region.
I still think the best bet is a foreign buyer like NTT Communications (NYSE:NTT, news, filings), however perhaps the problem there would be the government contracts?
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Categories: ILECs, PTTs · Internet Backbones · Mergers and Acquisitions
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Did any else notice the 10,000 option call contracts sold yesterday? The buyer bought the Jan 2010 call contracts at $12.50. The math works out to be a $50,000 lottery ticket for the right to buy 1,000,000 shares of Q for $12.50 by about the middle of 01/2010…..
Cavtel –whose debt is trading at 15 — kind of makes me discount everything else i read on the blog.
Someone proposed them in a comment yesterday, else I’d not have brought up the name.
Cavtel is as much of a fantasy buyer as Level3 (you can credit the WSJ with that one)…. Rob is right.. at this point very difficult to see how this deal could be financed
Rob – what kind of odds can I get on a service provider buying them, like a datacenter or CDN?
Why not?
Hmmm, now that’s an idea. Of course, only the biggest would qualify, i.e. Equinix and Akamai. I think either could pull it off if they wanted to. I don’t think Equinix wants to operate fiber, it would conflict with their carrier neutral business and the cost savings are hard to find. I’d put it at ‘Low’ probability.
As for Akamai, if they become convinced they need fiber then it could happen. I don’t think they have reached that point, the usefulness of a CDN owning fiber remains mostly theoretical. I’d put it at ‘Low to Medium’.
I would throw TDS Telecom into the mix. They have been consolidating RLECs for years and might make good use of a backbone to replicate the VzB/VZ/VzW model given their U.S.Celluar holdings.
Potential Deal structure:
Level 3 chips in $500M in cash and keeps 300M its own bond retirement.
Sell $700m in convertible Bonds to Leucaida, Buffet, Fairfax, Longleaf(w/ $1.5B cash from Java deal)) or Google.
Get Q to put up vendor financing for the remainder or even swap the Level 3 wholesale voice division.
Potential Deal structure:
Level 3 chips in $500M in cash and keeps 300M for its bond retirement.
Sell $700m in convertible Bonds to Leucaida, Buffet, Fairfax, Longleaf(w/ $1.5B cash from Java deal)) or Google.
Get Q to put up vendor financing for the remainder or even swap the Level 3 wholesale voice division to sweeten the deal.
Whatever buyer depends on where Qwest leaves the current $13 B in debt. As a local exchange carrier, that debt makes no sense. It’s bad enough the way it is.