Carrier M&A's that really need to happen

May 22nd, 2008 by · 8 Comments

Today Ike Elliott suggested Level 3 may soon be on the prowl for more acquisitions.  I am not so sure, maybe in 6 months though.  However, there are others out there with money and a reason to buy, and there are many out there that look like prime buyout material.  And then there are those that need to be bought - well, maybe they don't think so, but everyone else does.

Let's use a Naval analogy.  In the carrier world today, you have lots of different types of ships.  You have the battleships and carriers - AT&T, Verizon, BT, DT, etc - slow but with more guns than small countries.  You have the heavy and light cruisers - Qwest, Level 3, TWTC, Colt, Interoute, Paetec - some guns, some speed, enough to be dangerous.  Then you have the light destroyers - Zayo, AFS, Cogent - light on firepower but faster than anything in the water.  And then you have the creaking hulks, the boats you can't believe actually still float let alone fight.  It's that last group I'm talking about:

Abovenet - The other day I celebrated Abovenet's first 10-k filing in 5 years, but its just time for these prime assets to land in the hands of someone who knows how to actually use them.  Preferably someone who can count.  The best fit here would be TWTC, which could really use the tier-1 east coast metro fiber markets, the place they are weakest.

XO - Ever since Icahn took control and brought it out of bankruptcy court, XO's ship has been listing sharply to one side and floating around with the current.  Their current plan is to transform from legacy services to IP services - wow, where'd they think that one up - and to preserve their LMDS spectrum.  Basically, a holding pattern for Icahn until he is finally ready to do something (see my thoughts on that).  Top candidates for this would be Qwest, Level 3, or TWTC - each could do far more with the assets than XO can.

ITC Deltacom -  I guess they're called simply Deltacom now?  Whatever.  They recapitalized yet again last year, and continue to plug away at the same revenue levels with no apparent other prospects.  But it is just obvious that their sizeable revenue pile would do better on someone else's network.  After Paetec digests  McLeodUSA, I think they're the obvious buyer here.

Global Crossing -  Yes they have improved, they are no longer actually visibly sinking.  However, their lack of metro fiber hurts them going forward in a more consolidated industry, and their gross margins will always be at risk unless that changes.  They also lack the cashflow to invest in their network to the extent that they can solve this problem on their own - hence these assets and customers are just worth more on someone else's network.  If money weren't a consideration, I think Level 3 would be the obvious candidate here, in the fall perhaps.  Qwest could be an alternative, but they would need to want to play an international game that they don't currently play.  But the mostly likely scenario in my opinion would be an international player, probably from Asia.

360Networks
- That's right, they still exist, can you believe it?  While they sold most of their assets a few years ago, they remained with the old TouchAmerica network and have been re-emerging as a wholesale voip and transport player in the rockies and pacific northwest.  But how far can they really go like this?  The old touch america assets need to find a home in this post-crash era, and I think they go best perhaps with someone like AFS if Level 3 or TWTC doesn't pick them up.

Viatel -  Somebody buy it!  Anybody!  Please!  Can you believe they still exist?  Their annual filings show a company with massively negative margins and few customers.  They are controlled by Morgan Stanley who has to keep pumping money in even as assets get sold off, you have to figure they'll take almost any exit plan.  Viatel still sits on a continental european fiber/conduit network that has to have value to someone - though I'm not sure exactly who would fit best.

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Categories: Internet Backbones · Mergers and Acquisitions · Metro fiber

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8 Comments So Far


  • The_highwayman says:

    So Rob….who in your analogy is the submarine?

    this is not meant to be a joke…I am being very serious….

    IOW who could torpedo who and make the stealthy and surprise kill(MNA) that nobody would see coming?

    And who is the sub hunting right now?

    I will check back for your thoughts and may add a few of my own…

  • Rob Powell says:

    I would say that the submarines would be the ships that most people don’t see or discount, but who have more financial firepower than we generally realize. In this case, they are the Asian telecoms: VSNL, Reliance, Hutchison, NTT, China Netcom/Telecom/Mobile, etc.

    As for who is hunting for whom, the whole nature of a sub is that you don’t see it until it is too late… I don’t know.

  • The_highwayman says:

    you and I think to much alike my friend…

  • Ike Elliott says:

    Rob, what about the big European Telcos? Would DT, FT, BT, TI, or Telefonica be looking to make acquisitions of any of these creaking hulks? The Euro is strong versus the dollar now!

    Excellent post, Rob, very insightful.

  • Rob Powell says:

    I’ve come to believe that the European incumbents care about Europe and little else, much like the foreign policy overall across the pond. Any of them might go after GCUK, but they have all passed on Viatel many times already. None seem unwilling to risk another foray in the USA, perhaps still vividly remembering the fleecing C&W and FT received last time. Who knows though, they certainly have the firepower.

  • DATA_MAN says:

    Rob where does NUVOX fit in? Do you forsee them as a nugget for someone to gobble up?

  • Rob Powell says:

    DATA_MAN,

    Nuvox is a company I don’t know as much about, they seem a bit stronger than those on this list though. A target? Sure, maybe for Paetec or something, but they could also do some acquiring of their own, perhaps Deltacom?

    Rob

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