The other day I mentioned that TW Telecom (NASDAQ:TWTC, news, filings) seems like it should be ready to make a big move. In 2009 the company became profitable at last, and entered this recession in a position of stability and with continued growth in mind. Such difficult times as these can be opportunities for those with the means, and the lack of easy access to capital makes this a buyers market if there ever was one. And there is one M&A possibility that stands out from the rest for TW Telecom, one that is both game-changing and entirely feasible: XO Holdings (news, filings). No, I have nobody whispering in my ear, in fact it is too quiet – as I have said. I’ll make the case as follows:
- The assets fit perfectly – While both TW Telecom and XO are national providers, each has geographic strengths and weaknesses. TW Telecom’s assets in the Northeast are sparse – they don’t even go to New England or Pennsylvania, whereas it is one of XO’s strongest regions. TW Telecom leases much of its intercity capacity from providers such as Level 3, whereas XO has those 18 fibers on the Level 3 backbone they lit with Infinera gear recently. Put simply, XO’s best assets fill in TW Telecom’s blanks and the rest just adds scale. Combined they would have 13,000+ on-net buildings and $2.5B in revenue.
- They have the integration expertise – The Xspedius integration went very well, and is basically over now. One of the biggest unspoken assets to come out of the process is the expertise gained by TW Telecom’s workforce. Such an asset has a short half life, it is only valuable if it gets used before it decays.
- Cost savings would be huge – XO has 1.3B in revenues that it gets very little out of. If you put those revenues on TW Telecom’s 10,000 on-net footprint, there is the potential for huge savings – $200M seems like a very conservative estimate. Given that demand isn’t likely to be explosive over the next few years due to the economy (despite the healthy market for metro fiber), earnings growth that could be found from such cost savings is attractive.
- Pricing is attractive – XO’s stock price hovers below $0.20, but of course that is almost irrelevant to M&A since most of the cost would be to buy the preferred stock. Even still, the company’s EV is below $700M at full value of that preferred – which itself isn’t that clear.
- No bankers required – The main inhibitor to M&A in this market is obviously access to capital at a reasonable price (or at all!). But for a TWTC-XOHO merger, no help is required because so much of the preferred is held by Carl Icahn. His investment in XO isn’t going anywhere fast, and he can’t cash out now anyway. What could be more favorable to him than a stock deal where he swaps his illiquid XO preferred shares for a liquid stake in combined company that *is* going somewhere? They could even structure it so that he keeps those NOLs.
Of course, the biggest inhibitor to such a deal is Carl Icahn himself. For one thing he would lose is the power over XO he has exercised, having run it as his semi-private playpen for years. But that fun has to get old sometime, and there have long been rumors that he wanted a piece of TW Telecom. On the other hand, they might not really want him on their board: he’s high maintenance to say the least.
The second biggest inhibitor of course is the natural caution of TW Telecom’s management – they just don’t take many chances. That focus on internal development and reduction of risk is the very thing that has led them to such an advantageous position right now. But an advantageous position is only useful if one occasionally, err, takes advantage of it right?
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