At the Jefferies conference on Tuesday, Global Crossing was unflaggingly optimistic about its growth prospects. Economic headwinds or not, they flat out refused to back off from their guidance and said things remain good. Controversial? Perhaps, but the most interesting comment came in response to a question on consolidation opportunities:
…it goes to geography of the world in terms of next steps … In terms of building the business to the strength of what performance we’re seeing in the UK and Impsat, North America would be a place where additional scale could be used as well as continental Europe. So as we look at targets, should they become actionable, those would be the two regions of the world… and focus on providers that have DNA for access facilities that support the IP product line.
Now, I’ve stated a few times that I think Level 3’s next target ought to be Global Crossing. But what if Global Crossing is doing the buying, what makes sense for them in the USA? If we look at their needs, it helps winnow the field. Global’s problem in the USA is not scale, they have plenty of customers and revenue. Their problem is margins – they have minimal metro fiber and thus must lease from others to hook up their large corporate customers. In order to make the USA into a higher margin business, they need to buy some metro fiber. But the metro fiber they need is in all the Tier 1 cities, where one finds the offices of those multinational corporations that they prefer to serve plus their wholesale business in and out of carrier hotels. What they don’t need is smaller market stuff. And they would want a customer base that doesn’t conflict with their large enterprise focus, e.g. they sold their SME biz and are happy they did so they won’t likely buy a new one. And their resources aren’t that extensive, in this environment they would have to use stock and perhaps some backing from their majority owner in Singapore – certainly less than $1B even then.
So when we take that analysis and apply it to the current (somewhat winnowed) crop of metro fiber M&A candidates, there is really only one candidate that fits the bill: Abovenet. Abovenet’s assets would seem to solve most of Global Crossing’s problems in the USA without adding much if any extra baggage in smaller markets with smaller customers. And it would be sort of poetic, wouldn’t it? We would have what were arguably the two most dramatic nextgen network meltdowns from the bubble days, settling down together at last to make something viable.
How about in continental Europe? In that market they lack both scale and metro depth, their problems are somewhat larger and harder to solve within their current financial means. Frankly, I can’t think of a perfect candidate there that isn’t too big (e.g. Colt, Interoute), or too local (Lambdanet). Any suggestions?
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