Finding a Likely Buyer For Cogent

Lately Cogent Communications (NASDAQ:CCOI, news, filings) has begun to come up more frequently as a fiber M&A target in both the media and analyst reports, while for many years they haven’t really popped up too much in the various consolidation rumors.  That’s partly because they’ve stated that prices are higher than they are willing to pay, while CEO Dave Schaeffer has seemed focused on simply continuing to chart an independent, disruptive path through the sector to positive earnings.

Cogent has been very quiet for many quarters now, while for the past few months the stock price has soared even despite the expected impact of the MegaUpload incident. Something might actually be up, or at least a fair number of market participants seem to think so. That brings up the obvious question: who would the buyer be?  Last fall I thought AboveNet might fit, and it still does but the point is now obviously moot.  There are plenty of other possibilities, but most have drawbacks.  Here’s a quick look at the (IMHO) most likely candidates:

• Level 3 – This is the name that comes up the most, so let’s tackle it first. Certainly Level 3 would have reasons to take out Cogent. The revenue streams and assets match well enough, and they surely wouldn’t mind removing Cogent’s low priced IP transit offering from that market as another step toward better pricing stability. But there are drawbacks too. Cogent’s transit customers tend either to overlap with those of Level 3 directly or are very price-sensitive, and hence churn would be an issue. And from a corporate culture and salse force perspective these two companies don’t have a lot of love for each other, and the integration might prove more difficult than the synergies are actually worth. With the Global Crossing integration having a year still ahead of it, Level 3 isn’t likely to make a deal for a while unless it’s a perfect deal. I don’t think they pay up for Cogent, and I don’t think Cogent sells for anything less.
• NTT America – I like this possibility a lot more. NTT America has a top tier-1 backbone, but in the US it’s all built off leased wavelengths. They have not expressed interest in owning fiber, but that was true in the Pacific also until they bought PC-1. If they were going to go for any type of US fiber asset to supplement their backbone, I think it would be for something pure IP based on a couple fiber pairs like Cogent as opposed to something heavier with transport and voice like XO. NTT would also find a way to put the Cogent datacenter footprint to good use in its cloud-related expansions, and the metro footprint hooking up corporate customers in multi-tenant office buildings would only help them with their cloud-based enterprise plans. The European assets also fit well, as NTT has been expanding its European footprint but could use both the assets and scale that Cogent would bring. And finally, these two are acquainted. NTT once sold Cogent their Verio-derived smaller enterprise access business, while before reaching Tier-1 status a while back Cogent sometimes filled out its transit needs via NTT bandwidth.
• Private equity – They’re always out there, and they’ve got the firepower as we all know. The question that one must answer is what they would do with the assets that Cogent isn’t already doing, as Cogent is very tightly run (little if any fat to cut) and has had the funding for expansion at hand already (outside money not required for the present business model). Perhaps it would make sense as an acquisition platform for private equity interested in taking a more aggressive stance than Cogent does right now?  Which brings us to…
• Inteliquent – Yeah, I know that came out of left field perhaps, but think about it. With its tandem switching revenues reaching maturity, Inteliquent (NASDAQ:IQNT, news, filings) is placing much of its future growth on its IP/Ethernet backbone and its new hosted UC services. Cogent’s transit business fits very well with Tinet’s, and the combination would probably hold a very solid top-5 position in the Renesys rankings. The connected large multitenant office buildings would be a nice addition to the endpoints offered by their EtherCloud, and being able to sell hosted UC in addition to access to the customers within those buildings (through agents etc) could be a very high margin opportunity. The only sticking point is that Inteliquent would need some help, as they probably don’t have the firepower to take out Cogent without some imaginative financial footwork. Perhaps with an alliance with some private equity money? Hmmm…

Possible, but less Likely candidates:

• Comcast or another cable MSO – A cable MSO buying a fiber-based tier 1 backbone for itself with metro access hooking up hundreds of data centers and even more downtown multi-tenant corporate customers plus data center space to help power cloud-based offerings? This actually makes a lot of sense except for the European assets, which Comcast would care nothing for. Of course, they could always sell those, so you never know. But despite the frequent speculation that Comcast might take a path like this, I’ll believe it when I see it.
• Zayo – The asset fit works and we know Zayo is always hungry. But with the $2.2B AboveNet deal still on the menu but not yet eaten, the idea that they might take on another $1B deal any time soon would require stretching the bounds of plausibility further than seems reasonable. Next year perhaps?
• CenturyLink, Windstream, or Earthlink – I lump these together since the motivation would probably be similar: use Cogent’s corporate-centric business, datacenter square footage, and US fiber to help power their cloud-enterprise offensive. But they wouldn’t value the net-centric side of things highly, nor would the European fiber hold much interest. Besides, the multiple they’d have to pay would probably scare them off.
• Other foreign carriers – Teliasonera or Tata, for instance, would fit well with the net-centric side of Cogent’s business, but would have less use for the US corporate/metro stuff. Both would have far more interest in C&W Worldwide I think (as Tata has demonstrated of course.)
• XO – Just kidding. Haven’t seen any sign that Icahn is willing to pour another billion into telecom and internet infrastructure, although if he suddenly felt the itch then perhaps one could make a case for the combination.

Any other possibilities out there?  I’ll offer my two cents on any other candidates left in the comments below.

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Categories: Internet Backbones · Mergers and Acquisitions · Metro fiber