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.
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