Ed Gubbins of Telephony Unfiltered detailed some interesting remarks by Cogent Communications (NASDAQ:CCOI, news, filings) CEO Dave Schaeffer about Qwest’s longhaul network. Basically, he said they looked at it but it is just too expensive. My first reaction was along the lines of ‘Huh?’ because Cogent is just so much smaller that the very idea boggles the mind, even for Schaeffer who isn’t exactly known for playing down his importance in the world. Cogent’s enterprise value is below $400M and they have $66M in cash, and Qwest’s asking price is supposedly $2-3B. I happen to think that price tag is too high, but not by that much. Why would they even take the call? But as it turns out, I actually think there just might be a way it *could* happen.
How’s that? Well Verizon and Frontier just showed us the way. While their deal is structured such that Frontier is called the ‘buyer’, that isn’t really the best way to look at it. Actually, Verizon is buying Frontier, stuffing a bunch of its assets and a pile of debt into it, and then spinning it back off to both Frontier’s and its own shareholders. In other words, a gorilla that really wants to divest unprofitable assets can buy something to act as a container, fill it up, then sell it back. The difference? The container doesn’t need to raise money in a horrible credit market. Of course there is still a price and the container has to believe it will be worth the dilution and the assumed debt. Frontier obviously does.
So theoretically, maybe Cogent *could* do it the same way. But Cogent won’t work for a Qwest longhaul deal mainly because the combination isn’t particularly good. As Schaeffer himself mentioned, there just isn’t much overlap between the business models, and even less in terms of corporate culture. Good thing too, Schaeffer running Qwest’s fiber and forward pricing the entire transport market is a frightening prospect all by itself.
But that doesn’t mean Qwest can’t find a willing partner for this sort of deal, and if they really talked to Cogent then it implies they are pretty serious about finding one. Any candidates out there ready to be bought, stuffed, and spun off? All you need to be is about half the size of Qwest longhaul, have little debt on the balance sheet so you can take on a couple billion, metro assets to raise the margins, and owners just crazy enough to try it since they don’t need to raise cash. XO perhaps? Hmmmm.
The TelephonyOnline article also had this line though regarding Qwest longhaul’s financials: “$700 million in annualized run-rate EBITDA is not unrealistic.” I’m sorry, but yes it is. If Qwest longhaul were making $700M/year, they wouldn’t be selling it. At some 30% EBITDA margins on a business with relatively low capex requirements of 5-10%, it would be overflowing with cashflow and they’d be shouting it from the rooftops and planning to take over the world. I don’t know just how healthy Qwest longhaul might be, but it can’t be doing nearly that well.
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