The XO/Icahn soap opera is starting to get some real attention, with this story in the Wall Street Journal today. That certainly brings some firepower to the reporting, they have much more extensive contacts than I do and hence got some nice bits of information. Amongst them is the identity of the two unsolicited bidders for the company back in June 2008, which had been mentioned in the redacted legal documents as Bidder 1 and Bidder 2.
Bidder 2, who offered $940M for just the wireline assets and not the NOLs or Nextlink, was said to have completed 7 acquisitions in the past 18 months. I had thought it had to be Level 3, because while Zayo fit the number more accurately the size of the bid just seemed beyond their reach. But in fact it really was Zayo, which must mean that the company’s private equity backers saw a huge opportunity and were apparently willing not just to double their existing bet but to quadruple it. I can easily imagine Zayo CEO Dan Caruso wanting to get his hands on all that fiber, because he knows what to do with it. What a shocker it would have been if he had been able to pull that off!
Bidder 1, who offered something like $1B for the entire company, was amazingly PAETEC (news, filings). Such a bid so close on the heels of the McLeodUSA acquisition suggests a big change in Paetec’s view of itself. Taking its own $1.6B in revenues and seeking to put it onto the longhaul, regional, and metro fiber footprint of XO and McLeod would have been a stunning reversal for what had until 2008 been an entirely fiber-free CLEC – a good one in my opinion yet stunning nevertheless. But still, it is hard to figure out where that money would have come from, their existing debt had covenants which were already worrying the market at the time. Indeed Paetec’s share price collapsed last summer even before the market really melted down, largely on those worries.
And not in the picture, by name at least, were either TW Telecom (NASDAQ:TWTC, news, filings) or Level 3 Communications (NYSE:LVLT, news, filings). Either could have been the third still unnamed suitor who never actually got that far. Perhaps that is because they had tried the year before, had been rebuffed, and knew that Icahn wasn’t going to let it go.
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Categories: CLEC · Mergers and Acquisitions
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Telecom is a big industry and a small industry at the same time.
These two were rumored as it was going on … I agree with the WSJ article – no one is laying out that kind of debt facility given the integration risk and scale created.
Carl Icahn … that’s another story … he knows time favors owners of local fiber assets as an increasing asset of value, let alone the business side of it already having customers. Warren buffet knew this back in the 1980’s as he bought pipeline companies and held.
You can’t build today what XO owns for a billion dollars … let alone get customers with it. Carl cleaned up the balance sheet – they can wait for the appropriate price given Carl Icahn is the controlling share owner.
The telecom space has squeezed out a lot of distressed businesses that past few years … not much junk is left. Level 3 took out a lot by consolidating at low prices of sick companies.
What is left in the inventory today, regardless of size, are pretty healthy telecom companies.
Think about it – a surviving telecom firm, regardless of business model, that made it through the telecoms meltdown 2001-2003 and our current state of affairs must be pretty good at what they do.
Would you take a price or a buying mentality from 4 years ago today? Sure everyone says what are the comps — well EBITDA comps will fall and rise; if that is the simple, non-sophisticated model to value future opportunity … healthy, especilly local fiber companies can afford to wait and keep growing by double digits every year.
Healthy companies can afford to wait for the Wall Street rise of EBITDA as the analysts do not distinguish diverse value and long term sustainability of a carrier by what they own, where they are focused, etc.
Dave,
I agree with most of your observations and certainly if Paetec and Zayo were the respective bidders then one has to question the finaceability of those offers. However, that is not the real story here– it is the use and abuse of majority control by Icahn in a spectacular example of hypocracy. Carl Icahn is to shareholder rights and the exercise of proper corporate governance as O.J. Simpson is to harmony and arbitration of disputes within the institution of marriage.
Now reasonable people can disagree about the current and future value of XO. What, I think, is clear is that they chronically underperform compared to a basket of peers, and that they are worth far more than 55 cents (the Icahn offer) to any number of potential acquirors who could run it better and realize significant savings. Icahn has no obligation to sell but he does have an obligation not to take serial actions that drive down the price and then attempt to acquire it on the cheap. That’s the real story here.
I agree … but Carl Icahn has more lawyers than some CLECs have employees …
Icahn can wait .. do nothing is always a choice …
Very interesting. Like you said, seems hard to believe that Paetec could have lined up the financing. Maybe Arunas has a rich uncle?
My primary concern with XO would be integration risk. The Fairpoint acquisition of Verizon’s New England assets pop into my head (a complete debacle). Of course, I think it helps that there are no consumer services involved.
I don’t think it is a coincidence that the healthiest *public* CLEC (TWTC) has grown mostly organically.
I have been a fan of TWTC for a long time – I favor the fiber, the sales discipline of not “buying business” and the controlled growth rate.
I am a bigger fan of AboveNet now that Bill LaPerch et al cleaned it up after some bad actors (none that went to jail). AboveNets projectory, product mix is very similar to ours.
TWTC lots of voice and manged services — not something that interests me in an evolving IP world.
Fairpoint — Verizon danced all the way to the bank. Copper access is a tough business and is going to get tougher.
I would have to argue that twtc is gaining ground in the enterprise space at such a “snowballing” rate that competitors aren’t close to their velocity.
Abovenet is good and in some key markets like Zayo, but tw is great and penetrated in all 75 of theirs with a solid model for expansion. Level 3 is in over 120 markets but they haven’t figured out how to sell it, install it, and maintain it. Their metro isn’t much better than XO’s. Neither have capital to invest in Metro expansions that tw has remained focused on. After the ILEC’s lock up local access on their residential fiber networks and alternatives like Cable MSO’s (currently unregulated) shut their doors…pure backbone providers like Paetec, Nuvox, and XO will be a part of our telecom history.
tw is positioned for another acquisition and it will come soon. At that point they will reach the point of diminishing return, loss of efficiency, adjustment of processes that made them great due to growing bureaucracy, and customer alienation due to their identity crisis – just like Level 3.
There has not yet to be a $2 billion CLEC that’s been been able to effectively handle their growth….
As consolidation occurs there will always be up and coming providers looking to expand. At that point – the Zayo’s and Abovenets will gain favor.