I’ve been asked now by several people whether there’s a rumor out there about TW Telecom and some sort of imminent M&A. I think the talk I’ve heard thus far is mostly derived from the surge in their stock price since the middle of last week which took them above $20 again for the first time in a long while, as opposed to word of an actual deal on the table. Thus far I would stress that I haven’t heard anything beyond that unspecific rumor of there being a rumor. But I really wouldn’t be at all surprised if there was something at the root of it, so this seems like as good a time as any to ramble a bit on the subject.
Last year M&A activity was focused amongst smaller fiber providers, but predictions that it might spread to the larger ones did prove true at least in the case of LVLT/GLBC earlier this month. And readers might recall that TW Telecom’s last big purchase was Xspedius back in 2006, and that it followed a string of metro fiber purchases by Level 3 in which TW Telecom was also bidding without success – notably for Telcove according to sources. History could easily repeat – I even made the case a few months back for a TWTC/GLBC deal. So if they are finally on the prowl again, who might TW Telecom target this time?
Well actually, because of its stronger balance sheet, free cash flow, and positive earnings, TW Telecom probably has many more choices available if it is interested. They don’t need to deal, and therefore can be opportunistic depending on what is available. Here are a few quick thoughts on various combinations:
- XO – I’ve made this case often enough to not do it again here. Suffice to say it’s a great fit on paper, but only if Icahn is ready to sell and nobody knows about that.
- Zayo – Given the attention span of most private equity money, speculation has arisen since new years that some of Zayo’s backers may be looking to cash in. Certainly there would be a fit in terms of assets with TW Telecom. But it wouldn’t be cheap, and hence I don’t think TW Telecom would have much incentive to bite.
- Sidera, Lightower, or FiberTech – Any of these northeastern regional fiber providers has assets that would be excellent strategic fits that fill some holes in coverage. As each is being actively operated by private equity with an eye toward consolidation on their own, they’re likely to be open to a deal. But as with Zayo, they probably wouldn’t come cheap.
- Broadview Networks – This northeastern CLEC with a bit of fiber is probably for sale and would help boost TW Telecom’s overall presence in the region. It would be more of a revenue play ($400M in 2010) than an asset play and the price would probably be at a more reasonable multiple than a denser fiber asset. TW Telecom could probably find substantial synergies by bringing more revenue on-net, so this is IMHO a real possibility.
- PAETEC – Yeah, think about it… Take all that revenue and put it on a combined national fiber network with what, 15K on-net buildings? PAETEC probably isn’t for sale right now and they’re busy integrating Cavalier and Intellifiber, but you never know.
- Sprint Wireline – Actually, this combination could make sense. The theory starts with the idea that a JV with Sprint being Level 3’s major alternative to buying GLBC. Now that it’s probably off the table for a couple of years, Sprint just might be looking at other options for its wireline business and a similar JV idea with TW Telecom and it’s dense metro footprint and enterprise focus could be quite appealing. Sprint has been running it for cashflow for some time now, but barring a new wave of investment in infrastructure it seems inevitable that they make some sort of move.
There are obviously other potential combinations, but that’s enough for now. Any thoughts?
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Categories: Mergers and Acquisitions · Metro fiber
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I guess the question is do you need a national LH network to be relevant. If so your XO commentary begins and ends the discussion. Sprint assets dont really fit that need and comes with dying voice revenues. Zayo assets that were of interest in my mind was the AFS/AGL assets of solid fiber networks in underserved cities. Beyond that I dont see the Zayo assets which are a rollup of 3rd party irus, poor and constrained metro loops and not the type of networks that TW runs today. If they wanted Zayo I would think they would have jumped ahead Zayo and took the AFS assest before Zayo. And they are not likely to pay 1 billion for Zayo as it stands today.
I didnt see the Abovenet mentioned and beefing up there fiber presence in major markets would not be a bad path although I am sure redundant to there current fiber.
I would sayXO followed by XO or viceversa. That followed by MA/merger with a cable company
As I indicated, I would tend to agree that Zayo and TWTC won’t happen because the two aren’t likely agree on the value of the assets.
I didn’t mention Abovenet because it just doesn’t seem too likely to me at this time – but as with SVVS/CTL today I’ve been wrong before and will be again.
Integra/ELI has been beefing up with talent. Think they are in the sights?
I tend to see Integra as an eventual target of PAETEC, not so much with TW Telecom. But it’s certainly not unthinkable.
PAETEC certainly has their sights set on the west either with Integra or Telepacific.
Rereading this knowing what we do today, I would be surprised if Sprint doesn’t look at TWTC as a real potential(potentially a preferred) buyer. Given the $425M in ebitda and the 5x multiple I had previously used it would mean TWTC at $550M in ebitda would be slightly bigger. Assuming TWTC does the entire thing with cash & debt b/c Sprint wants the cash means that TWTC would go from $1B in net debt to $3.5B but at 975M in ebitda that wouldn’t be impossible. It would mean TWTC would be levered at 3.6x net debt to ebitda or a level below level 3’s post synergy net debt. This assumes no synergies(TWTC/S). Given the different asset profiles the synergies wouldn’t be overwhelming but 10% of opex might be fair. So I think a deal is feasible and at that price I think Larissa might be intrigued but something tells me cable would distort that whether it be by finally taking TWTC out or by bidding for all of Sprint. I also don’t think Longleaf wants Larissa to take on that kind of mess.