XO as an Acquirer?

September 17th, 2008 by · 6 Comments

Over on TelecomStraightShooter, Dave Rusin posted yesterday that he sees XO more as an acquirer than as an acquiree right now.  This is of course in direct contradiction of the unscientific poll of my readers  over the past month (summarized at the bottom of this post) in which XO is the runaway favorite to be bought next, but then Dave doesn't ever fear holding a contrarian view.  While he makes some good points, let me say why I don't think it will happen:

  • XO is not really a metro fiber based company, they're a telecom company with metro fiber.  I say this because of where they have focused their effort, which simply has not been on using and extending their metro assets.  As an exercise, go to their 10-K for the year 2006 and search for the word 'buildings' - 4 hits, all about LMDS service.  Then search for the word 'central office' - 20 hits.  Before the BK, they talked of on-net buildings and added more each year and approached 3000 on-net then, but not since.
  • XO has tried before to buy revenue before to achieve scale and use its assets to drive better margins, that was what the Allegiance purchase was all about.  It just didn't work out that well, mostly because the revenues they have historically chased don't really fit a metro fiber orientation - lots of voice and access served from the central office which still uses the incumbent facilities.
  • There just aren't very many good targets left for XO to acquire right now.  Their valuation is low and they can't use stock for a purchase (else Icahn might lose his access to the NOLs), so all they have is their Icahn-provided cash pile of about $450M of which they need some for their own plans.  They're not going to find metro fiber that will make a difference in their business for anything they can afford.  And not many fiber-light carriers out there really fit the bill.  Paetec is probably too large for them to handle and most of the rest are already gone, absorbed already, or are voice-heavy (e.g. ITCD).

He is right of course that the NOLs are much less valuable to an acquirer, but any likely acquirer right now would probably already have their own pile of NOLs anyway (e.g. LVLT, TWTC).  My main point is that Dave's view of what metro fiber should be used for (as exemplified in AFS's operations) and XO's historical view of such an asset differ.  Unless XO starts using its metro fiber in the course of its own business the way TWTC or AFS or Zayo or Level 3 etc do, it's hard for me to see them becoming an acquirer on the basis of that asset.

[poll id="3"]

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Categories: Internet Backbones · Mergers and Acquisitions · Metro fiber · Old · Polls

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6 Comments So Far


  • tech101 says:

    Rob,

    Agree with you it is unlikely for XO to be an acquirer within the next 6 months. However, who knows what would happens in the next 12-24 months?

    Sentiment could change overnight. What happened to the share price of CCOI, AKAM? Both lost 60+% of their value in about a year. Even the mighty and darling TWTC lost more than half. A lot of things could happen in 12-24 months.

    Finally, Icahn has to keep XO for two years if he takes the NOLs.

    Have you read the following news by the way?

    XO Communications to Enhance Metro Network Transport Services with Ciena’s CN 4200 FlexSelect Advanced Services Platform

    http://digital50.com/news/items/BW/2001/07/14/20080916005508/xo-communications-to-enhance-metro-network-transport-services-with-cienas-cn-4200-fl.html

    XO is also extending its CDN offer in the upcoming StreamingMedia West 08 in San Jose Sept. 23-25.

  • Rob Powell says:

    Now now, let’s be clear. XO doesn’t have a CDN offering. They offer bandwidth to CDNs, especially those which would prefer not to depend on Level 3 or AT&T which of course do have CDN offerings.

    As for the metro gear announcement, it seems like a normal step in the way of things rather than anything new, but who knows.

  • Alfred J. Beljan says:

    any reason why you do not include Qwest Classic

  • Parkite says:

    Rob – You are misinformed about XO’s metro fiber assets. In many markets they have 100+ lit bldgs to data centers, carrier hotels, telecom-centric enterprises, etc. IMO, they have used their metro fiber assets very well. I do agree, though, that they aren’t a threat to purchase anyone.

  • Rob Powell says:

    Parkite, I think we disagree mainly in word usage. Certainly with 3000 on-net buildings and 38 metro fiber markets, they must average 80 per market and I’m sure the largest are 200 or even more – they have very good metro assets. My point was not the size of their footprint, but its lack of growth. I haven’t detected much movement at all in that 3000 number since they bought Allegiance. They have put all their capex into specious things like LMDS and not into bringing more cash and revenue generating buildings on-net. Yes they are using their metro assets, but only to serve their existing revenue base. TWTC is adding 1000 per year, LVLT is adding nearly that, and Zayo has some 500 going on this year. Even little Cogent is adding 100+/year and Abovenet has started to grow its footprint again. And XO, with its very nice footprint and solid 3000 buildings doesn’t invest to grow what is actually their best asset?

    XO will have to prove me that the eggs they’re sitting on are going to hatch eventually before I give them credit for growing chickens … 🙂 Of course it doesn’t help that they don’t talk to anyone outside of PRs and SEC filings.

  • Parkite says:

    Rob – It is a disclosure issue I believe. I know they have been lighting bldgs since the Allegiance acquisition. Post-BK they have been much less forthcoming with info consistent with the lack of listing on an exchange. Of course, you can only go off the info they provide unless you have inside info.

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