Just a month or two ago, it seemed like every fiber network in the country was considering its options. The second quarter began with q considering the sale of its longhaul networks, something which for a while woke up everyone from Verizon and AT&T on to Level 3 and all the way to Cogent. Global Crossing, which has been beating the M&A drums all year, did so again bringing up the possibility of Savvis. And then of course word leaked out that Sprint was considering contributing its wireline business toward some sort of joint venture. Every major network was either in play or looking to buy. But the result?
The only actual M&A to get past the ‘would they really do that?‘ stage was Zayo’s bid for Fibernet, following RCN’s choice to drop out of the bidding. Qwest publicly pulled its network from the market after it didn’t get bids of the right order of magnitude. Sprint then lumped its wireline operations with its wireless network in the outsourcing to LM Ericsson, which one probably wouldn’t do if one were about to sell them or combine them with another operator. It’s not precluded of course, it just implies that there is nothing immediate on the table. And yesterday Level 3 abandoned its attempt to loosen the terms on some of its bonds, apparently not getting the hoped for response from the bond markets and making it harder for them to finance a major deal. Is it all over now? Is it time to wait for next year already?
Actually, I would argue that what we have seen is simply a winnowing of the field of potential mergers. Those that just weren’t compelling enough to both sides right now have fallen by the wayside. The big two – the longhaul networks of Qwest and Sprint – were always longshots simply because they are so large that the capital markets would be very unlikely to fund them, heck they won’t even let Level 3 try. But none of this precludes the M&A activity that has always been more likely: small to medium sized deals where both sides are highly motivated to work something out and have mostly the same concerns. I submit that once Qwest and Sprint apparently pulled back, attention has returned to the two networks I have frequently and unofficially nominated ‘most likely to get bought’ several times over the past year.
Yes, I’m speaking of glbc and XO Holdings (news, filings). Icahn’s current attempt to take full control of XO seems to me to be a clear prelude to a sale or combination of some sort. Some would argue that he will be a buyer rather than a seller, I may disagree on that point but I think we all agree that Icahn’s actions are just his first move in a bigger plan. I think he senses that with the withdrawal of the giant M&A possibilities there is a window of opportunity opening for the medium sized ones, and he is scheming to take advantage of it. Global Crossing, on the other hand, has been quite open about the synergies it sees with other companies, hundreds of millions of dollars annually. I haven’t seen many people disputing that argument, the problem has been funding such a deal. The thawing of the credit markets has been making it easier and easier to see viable ways to get such a deal done.
Who would be the buyer? Verizon and AT&T are probably not in the M&A game anymore due to regulatory concerns and the new administration in Washington, and Qwest still seems passive. Honestly, both TW Telecom (NASDAQ:TWTC, news, filings) and Level 3 Communications (NYSE:LVLT, news, filings) probably have the means, the motive, and the opportunity right now to do a deal with either one of them. Everyone’s stock is depressed, so stock deals aren’t unreasonable between these companies, which leaves less to be funded by the markets. Take a possible deal between Level 3 and Global Crossing – a straight stock deal would leave some $900M in net debt to be refinanced. Difficult yes, but probably not impossible this summer if the two could agree on a price. XO is even easier since it is Icahn who owns the preferred and can structure a deal any way he feels like, we just have to wait to see how his attempt to buy out minority shareholders goes first.
Of course, other international buyers are always possible as well. Companies like Tata, Reliance, NTT, or even Telefonica have the means and you never know when they might decide to turn their eye this way. But for now, I sense the game is mostly domestic simply because its about turning those potential synergies into better cash flow, something everyone wants as much of as they can get nowadays.
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