Late last week, the Wall Street Journal reported yet again that bids for Qwest's longhaul network have been coming in rather light to say the least. To readers of Telecom Ramblings, that probably came as no surprise given my earlier opinions on the subject. But what intrigued me about the report was the inclusion of XO Holdings (news, filings) amongst those still interested according to many articles, because on their own that makes no sense at all. Therefore, I really wonder if there could be something else going on here.
XO of course, simply hasn't got the resources of its own to even think about this. They have $383M of cash available, but that isn't even close to enough. With their stock price at $0.33, they'd have to issue 2B shares just to scrape up an offer of $1B. And having already lit their Level 3 fiber, the prospect of taking over the Qwest footprint just seems like putting together puzzle pieces that don't help each enough. There would be synergies of course, but frankly the asset fit is weak next to a pairing of Q and any of LVLT, TWTC, or even GLBC.
But XO is controlled by billionaire Carl Icahn, and therefore if they are involved in the Qwest longhaul auction it is almost certainly as his proxy. So let's look at this from Icahn's point of view. He put a pile of money into XO, and it has just sat there for years. He may be a patient guy, but it is because he is an opportunist and what we have here is an opportunity. We have a willing seller, willing buyers, but unwilling bankers. Icahn has billions at his disposal, but XO just isn't that good a fit for Qwest longhaul. However, it is a really nice bargaining chip. A bargaining chip that comes with a pile of tier-1 metro fiber, $1.4B in revenues, $383M in cash on the balance sheet, and debt and preferred stock whose terms he can rewrite almost at will.
Now, Level 3 Communications (NYSE:LVLT, news, filings), TW Telecom (NASDAQ:TWTC, news, filings), and glbc have, like many, always preferred to keep Icahn at arms length. But if just one of them wants Qwest longhaul badly enough, he could step in and make it happen. For a price of course. But in this environment where cash is so expensive, he may have more bargaining power than he has ever had. If he is going to make a move with XO, now may be the best and perhaps only time. The last time we saw billionaires try their hand at telecom was in the depths of the telecom nuclear winter, it isn't that big a leap for them to be at it again.
Suppose Icahn goes to Level 3 and offers them a deal. He'll throw all of XO's assets into the deal and roll its preferred stock plus a few hundred million dollars into some kind of new senior converts or preferred shares with Level 3, then Level 3 can use the cash on its balance sheet while raising a few hundred million more in from its usual partners and give stock to XO's common shareholders at $0.50, and in combination they can bid $1.5B (pick a number) in cash for Qwest Longhaul. Level 3 can then use the synergies that could be derived from all three companies to justify the deal. Icahn takes a big chunk of Level 3 - but still less than that owned by its current big friends at SEAM, Fairfax, Legg Mason, etc so there is no change of control. Level 3 gets that XO fiber back under its wing, which it has always wanted, and eliminates *2* competitors in one stroke. Icahn finally gets a big chunk of what ought to be a viable company one day but at the preferred level where he is insulated from the risks the Level 3 debt load always pose to common shares. He also gets to keep those pesky NOLs, since Level 3 certainly doesn't need them. And last but not least, Qwest gets a better deal for its longhaul network than it might otherwise have gotten. If you were Level 3, would you think about it?
It is possible to construct similarly compelling deals with TWTC or for Global Crossing, it all depends which (if any) wants it badly enough to let Icahn have a board seat or two or three. Remember that Icahn once tried to buy Global Crossing out of BK back in 2004, and there have always been rumors he wanted to combine XO with TWTC. Any of the three are plausible, if they are willing of course. Three-way deals are hard to make of course because there are more people that must say yes and the terms get very complicated, and that's a big barrier. But right now, that barrier is not that much bigger than the one presented by the frozen credit markets, even if they are thawing a bit around the edges.
Is anything like this likely? Probably not. But it sure would be a bombshell if it happened.
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