According to several sources, q is actively seeking a buyer for its longhaul network. I've lost track of how many times this has been rumored over the last 5 years, is it an even dozen yet? But anyway, the rumored price is in the $2-3B range, and although it isn't clear just how much of Qwest would be part of such a deal it surely isn't doing over $2B in revenues, nor is that part likely to have EBITDA above the 10-20% range. Hence, the EV/EBITDA ratio for such a sale would probably be well above current market valuations. Let's take a look at the potential suitors in some detail:
- Level 3: That Level 3 Communications (NYSE:LVLT, news, filings) has always wanted the Qwest assets is well known, and the deep pockets they always seem to have access to in a pinch cannot be ignored. However, I'm sorry I just can't make this deal work financially. Even from the friendliest of hands, to raise $2B LVLT would need to pay 10% interest *and* give away half the company. And even if they could find the cost savings to justify that, they would be able to find far more by buying glbc with the same money. Probability: Very Low.
- TW Telecom: If TW Telecom (NASDAQ:TWTC, news, filings) wants a backbone to go with its metro assets, they might be interested I guess. But with XO Holdings (news, filings) at much lower valuations and a more favorable fit in many ways, I doubt it. Like Level 3, TW Telecom would need big friends to find the money for such a deal, and that money is just too expensive whether it comes in the form of dilution or interest payments. Probability: Very Low.
- Global Crossing: The US backbone of glbc runs on 24 fibers on the Qwest network, thus they might have an easier time integrating the assets than anyone else. And with their backers in Singapore, raising the money might even be possible. But if John Legere had $2B to spend on assets in the USA he would surely put it to use buying assets that would increase margins there - i.e. metro rings etc. Probability: Very Low.
- AT&T and Verizon: That both AT&T (NYSE:T, news, filings) and Verizon (NYSE:VZ, news, filings) could buy Qwest longhaul any time they want is a given, it would be pocket change. But do they want it? Do they need it? What does it help them do? The cost savings alone would not justify the deal any better for them than for the smaller guys above. The only reason they might need or want Qwest is that their own backbones might run out of room someday, and Qwest has those two extra conduits nationally. In other words, they would need to be taking a longer view than seems likely right now in the depths of a recession. And why incur the wrath of regulators at the new FCC when you don't have to? Probability: Medium.
Well who then? I think the media is not looking globally enough yet - the real buyers (if they exist) are those with the following: 1) billions of cash, 2) US assets to combine for cost savings, and 3) a long term view of the assets. I see no indication that any European giants are looking beyond their continent, but in Asia it's a different story.
- Tata or Reliance: The Indian carriers may have less available cash now than a year or two ago, but they still have enough to get things done. Reliance is the more likely of the two, because they have already shown interest in US fiber by buying Yipes. Yet given the anything-you-can-do-I-can-do-better relationship between the two, Tata can't be ruled out. Both carriers are looking to challenge the big guys internationally over the next decade and are known to be looking for greater access to the US market. That said, the time doesn't seem quite right. Probability: Medium
- NTT: The Japanese incumbent NTT Communications (NYSE:NTT, news, filings) already has a US arm (NTT America) which it built out of the Verio assets. They have become increasingly aggressive in the USA lately, even to the extent of sponsoring an ad here on Telecom Ramblings up in the header. But their capacity is all leased in the form of wavelengths, and if they really mean business then Qwest longhaul seems to fit quite well. Like AT&T and Verizon they could buy it out of pocket change, but unlike them they would actually have both an immediate use for the assets themselves and the long term view necessary to appreciate the value of the conduits. Couple that with NTT's rumored bid for Pacific Crossing and maybe some metro assets down the line and one has the makings of a Japanese telecom invasion. Probability: Medium to High.
If history is any guide, though, this rumor is probably bunk - at best a trial balloon to see what they can get for it. What do readers think? Here's a poll: