M&A Journal: tw telecom and Sprint Wireline?

October 20th, 2011 by · 10 Comments

A few days ago when I talked about the possiblity of Sprint selling off its wireline division to pay for its LTE buildout, I focused on only two potential suitors: Level 3 and CenturyLink. But a regular commenter brought up a third bidder that I neglected to mention but which may be just as likely: TW Telecom (NASDAQ:TWTC, news, filings).

While smaller than the others, tw telecom has the advantage of not being busy with another integration right now – CenturyLink has Qwest and Savvis, and Level 3 has Global Crossing.  Meanwhile, tw telecom has just been growing steadily with EBITDA margins at 37%, producing plenty of free cash flow and actual earnings per share.  They have plenty of room on their balance sheet to make a big move, though this would be BIG.  Honestly though, tw telecom has been so quiet this year that it has been easy to forget that they are out there, lying in wait for the deal that really makes sense.

Strategically there are many reasons why such a deal might be attractive.

  • There would be obvious synergies in combining tw telecom’s metro footprint with Sprint’s mostly longhaul business, and Sprint’s revenue matched up with tw telecom’s EBITDA margins would be formidable.
  • While tw telecom has usually de-emphasized its wholesale carrier business relative to the enterprise market, it does have one and adding that of Sprint would give them enough scale to do something more substantial than either can do alone.
  • Whereas Sprint’s infrastructure is old and hasn’t been invested in, tw telecom has proven that it knows how to spend capex and generate value when it comes to fiber.  Their partial intercity footprint would be a starting point for the eventual upgrade of Sprint’s transport and transit backbone.  Throw in a later buy of XO, and it’d be a whole new ballgame.
  • tw telecom has already been making inroads into the large enterprise space, but purchasing Sprint’s customer base would give them instant scale and relationships to sell newer services into.
  • Their national metro presence is just as capable as any other suitor’s for helping Sprint build out backhaul for its LTE plans.
So I agree, if Sprint puts its wireline division up for sale, tw telecom could be a serious contender – one that would be ready to rumble today rather than next year.  But on the other hand, it would require a very aggressive move from a very conservative leadership team.  Would a transformational acquisition be a better direction for the company than organic growth?  Or would it just be a big, dubious risk they can do without?

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Categories: Internet Backbones · Mergers and Acquisitions · Metro fiber

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10 Comments So Far

  • Mr. Poppers says:

    There won’t be anything left to XO to buy as Laura Thomas is running XO into the ground. How ironic as Icahn is a distressed asset buyer not distressed asset seller. I can see, however, tw telecom picking something up …. They need to do something soon. How about DT or NTT picking up something in NA?

    • Rob Powell says:

      The foreign PTTs are always there as possibilities, but for some time now all of them have been skittish with respect to actually owning substantial US assets. Either NTT or DT could do it, but I somewhat doubt either sees this as a priority.

  • MIke Smith says:

    Agreed that Sprint assets are viewed as strategic to a foreign PTT but there aren’t many with the size, scope and connectivity left. Besides its pretty clear that Sprint is harvesting it’s wireline business until they sell it so it’s quite possible they’d be willing to form a strategic partnership like an addition by subtraction event. In DTs case perhaps they buy wireline division of sprint but unload tmobile assets if AT&T fails to win its bid?

  • Brian Scully says:

    Any thoughts on the continued speculation that L3 will make a last minute offer to the PAETEC BOD before the 27th. Many cases made for a greater strategic use of assets and value for L3 and PAET shareholders than for a WIN/PAET deal. Not like L3 has not done a multiple purchase acquisition before.

    • Anonymous says:

      WIN projects being engineered to interconnect with PAETEC fiber. Internally, WIN thinks it is a done deal. I don’t know if that is standard operation procedures for these types of deals or not.

  • Brian Scully says:

    They are pushing for close on or before 11/30.

  • schmuckinsurance says:

    How about Time Warner Cable or Comcast using their share of the $3.6B SpectrumCo cash for Sprint’s wireline asset which I had been assumed a buyer would want to pay ~$2.25B? Obviously they have much bigger pockets than Larissa does but I think it is hard to get to scale via M&A when that acquisition is of such low quality – I would think TWC & Comcast investors would prefer to pay up(on a multiple basis) for TWTC. Anyone have an educated opinion here?

  • schmuckinsurance says:

    Given today’s stock action, someone believes TWTC is putting sprint wireline in play or is in play itself. Any guesses?

  • mhammett says:

    Maybe another card Hunter Newby has up his sleeve are companies like Sprint that have a severely aging fiber plant that could use some freshening up.

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