The other day I mentioned that TW Telecom (NASDAQ:TWTC, news, filings) seems like it should be ready to make a big move. In 2009 the company became profitable at last, and entered this recession in a position of stability and with continued growth in mind. Such difficult times as these can be opportunities for those with the means, and the lack of easy access to capital makes this a buyers market if there ever was one. And there is one M&A possibility that stands out from the rest for TW Telecom, one that is both game-changing and entirely feasible: XO Holdings (news, filings). No, I have nobody whispering in my ear, in fact it is too quiet – as I have said. I’ll make the case as follows:
- The assets fit perfectly – While both TW Telecom and XO are national providers, each has geographic strengths and weaknesses. TW Telecom’s assets in the Northeast are sparse – they don’t even go to New England or Pennsylvania, whereas it is one of XO’s strongest regions. TW Telecom leases much of its intercity capacity from providers such as Level 3, whereas XO has those 18 fibers on the Level 3 backbone they lit with Infinera gear recently. Put simply, XO’s best assets fill in TW Telecom’s blanks and the rest just adds scale. Combined they would have 13,000+ on-net buildings and $2.5B in revenue.
- They have the integration expertise – The Xspedius integration went very well, and is basically over now. One of the biggest unspoken assets to come out of the process is the expertise gained by TW Telecom’s workforce. Such an asset has a short half life, it is only valuable if it gets used before it decays.
- Cost savings would be huge – XO has 1.3B in revenues that it gets very little out of. If you put those revenues on TW Telecom’s 10,000 on-net footprint, there is the potential for huge savings – $200M seems like a very conservative estimate. Given that demand isn’t likely to be explosive over the next few years due to the economy (despite the healthy market for metro fiber), earnings growth that could be found from such cost savings is attractive.
- Pricing is attractive – XO’s stock price hovers below $0.20, but of course that is almost irrelevant to M&A since most of the cost would be to buy the preferred stock. Even still, the company’s EV is below $700M at full value of that preferred – which itself isn’t that clear.
- No bankers required – The main inhibitor to M&A in this market is obviously access to capital at a reasonable price (or at all!). But for a TWTC-XOHO merger, no help is required because so much of the preferred is held by Carl Icahn. His investment in XO isn’t going anywhere fast, and he can’t cash out now anyway. What could be more favorable to him than a stock deal where he swaps his illiquid XO preferred shares for a liquid stake in combined company that *is* going somewhere? They could even structure it so that he keeps those NOLs.
Of course, the biggest inhibitor to such a deal is Carl Icahn himself. For one thing he would lose is the power over XO he has exercised, having run it as his semi-private playpen for years. But that fun has to get old sometime, and there have long been rumors that he wanted a piece of TW Telecom. On the other hand, they might not really want him on their board: he’s high maintenance to say the least.
The second biggest inhibitor of course is the natural caution of TW Telecom’s management – they just don’t take many chances. That focus on internal development and reduction of risk is the very thing that has led them to such an advantageous position right now. But an advantageous position is only useful if one occasionally, err, takes advantage of it right?
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Categories: Internet Backbones · Mergers and Acquisitions · Metro fiber
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“They have the integration expertise ” this is a very subjective assumption. Xspedius may have gone well, but that , as they say is no indicator of future results. XO has integration experience too… remember Allegiance? How about LVLT’s integration experience, which by any measure historically has been abominably bad. Circuit Engineering, switch (hard or soft) and OSS platforms in the telecom industry are much harder to integrate than traditional operating systems such as CRM, HR, and others. As a MFSWorldCom vet, you can understand why I remain very skeptical of any claims of easy intergration among telecoms/ fiber network providers.
This article makes a number of bold assumptions, and is essentially bunk. Icahn owns 80% + of XO stock. Institutions are barred from buying anything with far less concentration of ownership. That is clearly not an indication of the value of a business such as XO. More likely, XO could be the buyer of a TWT, using Icahn’s bank. But the bigger question is why do it? To become a somewhat bigger, still very small player in a land of $100 Billion industry giants? There needs to be more value created that has special purpose, or this is all a waste of time. Think more strategically, or at least an order of magnitude bigger.
Where do you come up with this crap?
Where do you come up with this crap?
-Yes
This post:
Of course, the biggest inhibitor to such a deal is Carl Icahn himself.
???
Obviously, you don’t know the history very well.
I am going off a previous articles by you and others and this is a rumor that someone swirls every 6 months, every year until it happens so someoen can yell….see told ya so. I don’t see anyone buying anyone until the credit market behaves a bit more that’s all. No one is in a position to take this type of risk.
PS….from the past.. Rob Powell says:
August 5, 2008 at 12:20 pm
I would say that we have seen this story before. Sometimes when they hold out for a while, it works out ok (BWNG) and sometimes they get hurt (WilTel). Icahn is a stubborn guy, I think he holds out for a good price despite the risks.
As for other bidders, I find it easier to make a strategic case for Q or TWTC buying XO than LVLT simply due to customer focus and asset fit. LVLT would want only one thing from XO, their fiber and nascent wholesale biz. Until a few days ago, PAET would have been a candidate, but they seem to have problems to work out first.
Reply
TW telecom formely twtc would be flushing millions down the toilet if they buy XO, the positioning of the XO network and company culture is not a good fit, they would be more inline to merge with Qwest.
A CLEC (tw telecom) and an ILEC (Qwest)merging? How would that be possible? There is still a Telecommunications Act that will prohibit the elimination of “Competition” by acquisition. It’s been many years since I’ve done my research on the regulations….but if it were possible, all VZ, AT&T, or Qwest (for that matter) would have to do is pick all of us off in one fell swoop. An ILEC / CLEC merger just will not happen. If it does, welcome back Ma Bell.
Actually, Qwest bid heavily for the CLEC Allegiance back in 2004. It can happen, but you are right that a TWTC+Qwest deal would involve substantial regulatory scrutiny.
actually, you guys both forgot that verizon bought mci, which had acquired mfs in 1997, and sbc (now known as at&t) bought at&t which had purchased teleport in 1998. both these deals were post telecom act (1996). mfs and teleport were the leading clecs of the time, and are the major reasons why verizon and at&t have network out of their home regions. more recently, in 2006, qwest bought onFiber.
telecom 101,
ma bell is already back…
You used to have Pac Bell, Ameritech, Southwestern Bell Telephone, US West, Bell Atlantic, NYNEX, Bellsouth….
VZ took out SNET(not one of the original 7 BOC’s), NYNEX and Bell Atlantic and then SBC took out PAC Bell & Ameritech, and that left AT&T, SBC took them out…and then Bell South…
I would say MA bell is already back and do not see any real regulatory issues if Q sold thier LH biz…
So now we have
highwayman,
You’re right. Ma Bell’s break-up was a real joke and more of a shell game.
Interesting points about SNET, teleport, and MCI.
SNET was somewhat of a “one-off” that operated independently for a VERY LONG time…almost as long as the teletype. It was actually an asset that AT&T owned a small portion of before the act of 96. Since AT&T was in the long-distance business, there was no challenge to competition for the DOJ to challenge. AT&T wasn’t an RBOC.
AT&T and MCI were IXC’s not CLEC’s or RBOC’s which were competing for the same customers with the same services. Nothing to challenge there really either from a TCOM Act perspective.
MCI of course owned the UUNET Internet backbone so there was no competitive disadvantage to Verizon buying something it didn’t have (IXC and Internet backbones). Prior to the MCI purchase, Verizon was using Genuity’s backbone for Internet service (Now Level3).
The recent OnFiber purchase by Qwest was also not an ILEC to CLEC transaction. It was more of an asset based purchase. OnFiber sold raw transport over their fiber optic network and wasn’t even classified as a CLEC. Voice never played a part in their buisness. They were just like AboveNet. The only thing Qwest got out of the deal was some local metro fiber and some long-haul. Nothing much to raise an eyebrow about….
With high capacity long haul transport and wavelength prices dropping so fast, what are pieces of Qwest long-haul fiber routes really worth these days? 2 to 3 Billion? No way! Not when you can have telecom’s muxing a strand to carry 40+ Gb of capacity and dropping their pants to get a deal in the door. I think Qwest sees the writing on the wall and realizes that all those excess LH fibers are not worth any where near what they used to be. The long-haul market is a commodity that depreciates every quarter and every time equipment manufacturers squeeze more out of the optics. The metro fiber assests are where the money is and company’s like tw telecom are in a position to snowball the enterprise base.
Rob’s right – tw should buy XO. Not only to fill in some gaps in the infrastructure, but there are a lot of services XO does fairly well that would enhance the offerings of tw – particularly on the Voice and Integrated services.
I’m still fairly comfortable stating that CLEC’s like tw, XO, and Level 3 will be protected by the department of justice if there ever was a threat of an acquisition by an ILEC like Qwest.
Mr. Wagner met with the heads of Level 3 here in Colorado recently and I wouldnt be surprised if that was the next move for XO and Level 3 to team up. They do fit together nicely.
Careful, you’ll stir up the conspiracy theorists…
I know LVLT would love to get XO’s fiber back, but if I were going to count on my fingers all the times XO and LVLT have been rumored to be talking, I’d need an extra two arms and three legs. 🙂
For now, if Q longhaul is really for sale then that probably takes precedence any bid for XO, only because there may be only one bite at the apple.
Re: XO. Does Icahn safely have that NOL now? could he split the rest of the company off now like Wiltel did or is it not a done deal yet?
He has access to the NOLs, but they aren’t fully separated and under his wing. Any deal would probably involve them going to Icahn though.
Its interesting because even the building manager has been looking for a new job. The building XO is currently in has alot of problems. Maintenance and such that I dont think XO wants to invest alot of capital into the building. I believe its only a matter of months and XO in Denver will be gone or combined with L3. I know its been rumored but XO isnt in the negative in fact we’re positive despite the hard times.
You are looking pretty good on this one today! Good job.
Is there some news I’m not aware of?