Handicapping XO’s Next Stage

June 7th, 2012 by · 17 Comments

Ok, I’ve been asked enough times now to update my opinion about where XO goes from here, although I don’t think the situation has changed all that much. Given the astonishing length and duration of the comment thread on the Layoffs at XO post, it has been clear that there are strong feelings involved.  But Icahn will sooner or later make a move, and it still seems most likely that it will happen soon after the 1 year anniversary of taking the company private when he won’t have to compensate the former minority shareholders unless a judge intervenes someday. There are only a limited number of options:

Keep, Operate, and Improve – XO’s current management team has been doggedly reorganizing the business since last fall, and it’s always possible that Icahn could intend to keep at it. It wouldn’t necessarily matter that others think it’s not going to work, he’s remarkably stubborn even for a billionaire. Yet, if Icahn hasn’t figured out by now that he isn’t the right owner for these assets, then he’s not as smart as we know he is. Probability: low, but Icahn plays the waiting game like no other.

Sell to Private Equity – This is probably the scenario that the remaining faithful at XO are secretly (or openly) hoping for, as it would keep the business intact under an owner that would invest in it and rebuild it around the solid underlying assets. Icahn would of course keep the tax assets, but they’d be free to do it right at last. There’s certainly no shortage of private equity money out there looking for infrastructure assets to buy low and sell high. However, such a buyer would have to be willing to do much, much more than apply a coat of paint and raise the capex budget in this case. Candidates: ABRY, Gores, CVC, Riverside, and many others or any combination thereof.  Probability: quite possible, but not probable.

Sell to a Strategic Buyer – With all the consolidation we have seen, this is the most obvious and most likely. It’s also the most immediately painful for employees, as any such buyer would surely slice and dice the business to achieve those synergies.  Yet fewer seem as eager right now to take on the task as there were a few years ago.  Let’s take the various potential buyers one by one:

  • Zayo: Caruso has bought four companies this year, and is rumored to have bid on XO a few years back.  But while he certainly could do so again, with AboveNet’s Tier 1 assets and intercity fiber IRUs I think the situation has changed.  Zayo no longer needs these assets and has better alternative targets, and hence wouldn’t need the hassle. Probability: average, but lower than it’s ever been. 
  • tw telecom: This has been my perennial favorite of course, as the asset and customer fit is perhaps the best of all combinations out there. But TWTC has to want it, and they’ve made no move on any M&A since Xspedius back in ’06. It’s been getting harder to believe they don’t mean it about going all-organic. Probability: moderate.
  • Level 3: They certainly would want the intercity fiber back, and the greater enterprise focus makes the customer fit a bit closer. But with the Global Crossing deal Level 3 became a different company, one that no longer needs it as much as it once did. Because of that, I doubt they would win a competitive auction against a more determined buyer. Probability: average.
  • Windstream or CenturyLink: Both could use the greater Tier 1 metro presence and enterprise customers as they move to a cloud footing to take on Verizon and AT&T more directly. But both are busy right now and have been giving off non-aggressive signals when it comes to M&A. CenturyLink has the means but less motive, while Windstream has the motive but less in the way of means.  Probability: average.
  • Earthlink: They’d certainly want to, as it would make the assets underlying their cloud transformation into a truly national platform.  And they aren’t afraid of buying declining revenue streams and operating them for cash — in fact they’re quite experienced at doing just that.  But they probably don’t have the means to pull it off without some help.  Probability: average.
  • Any foreign PTT: NTT, Teliasonera, Tata, BT, etc.  Still no indication any of these would want to buy XO. Probability: low.
  • AT&T or Verizon: Not a chance. Probability: very, very low.
  • Comcast or another Cable MSO: These guys have plenty of opportunity still in front of them as they ramp their enterprise business within their own footprints. They just don’t need to go national. Probability: low.
  • Google, Apple, Netflix, Facebook, etc: Nope.  Probability: approaching zero.

Here’s an off-the-wall possibility though.  What if Icahn were to break up the assets?  He could sell the wholesale bandwidth business and the raw fiber assets to a buyer more interested in those, while selling the CLEC business with a central office presence and all that, with a functional national fiber infrastructure hooking it all together leased from the first buyer.  Level 3 or Zayo would fit the first bill, while Earthlink or even someone like Integra Telecom would fit the second.  A team effort?  Hmmmm… I actually think that might work.

Anybody I missed?  Any other possibilities on tap?

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Categories: CLEC · Mergers and Acquisitions · Metro fiber

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17 Comments So Far

  • Mayan Tzolk'in says:

    I think your “Off The Wall” scenario is most likely because no one has been willing to give Icahn $2B on an all-in bet however the sum of the parts might cover his ask. Plus he puts the NOL’s in his newly spun off CCS.

    How about throwing DT into the mix? T-Mobile has a pocket full of cash & could use the infrastructure. They could take it all or be a partner with ELNK (most likely)- which BTW needs a mobile offering, just a thought.

  • Grant Lewis says:

    Rob – thank you for the well thought out summary on “Whats next for XO”. While I agree with most of your thoughts i’d offer the following thoughts … At this point its my professional opinion that Carl Icahn is NOT going to sell this company in the near term as some would suggest.

    The reason I believe this is to be the case is as follows:

    1. Carl Icahn is sitting on a ton of liquid cash according to his company proxies … i think around 4 Billion or so. With so much cash in liquidity it wouldn’t seem prudent to take on more cash unless you were going to invest it. The problem is right now most of the places he is going to invest like European investments, domestic investments are taking a beating and so he is going to wait for the floor to drop and a good opportunity to buy will occur. Until then I believe he won’t be compelled to sell XO as he won’t have a place to put the cash right now.

    2. I think Carl Icahn is pretty smart … perhaps shrewd is appropriate … but pretty smart as it relates to investments. Having spoken to Carl personally a few times he would tell you why sell something right now that in 18 or 24 months if wanted badly enough they will pay more for the assets. Such is the case for XO .. its worth more actually in 18 to 24 months than it is right now as Level 3, Zayo, Earthlink, a Foreign PTT, perhaps even another billionaire such as Carlos Slim might want to venture back into North America. Right now there’s too much still out there where buyers really are having their way. But with Carl and his deep pockets he can just wait them all out … quietly anticipating a day when they will need his assets more than they do right now.

    3. He’s got a mediocre team in place, not spending huge sums of money on investments when compared to other operators, yet somehow holding onto customers. Why change it if it aint broke?

    So there you have it …. feedback welcomed.

    • You could be right. I don’t follow Icahn’s overall investment portfolio, I’m not sure what impact that would have. But I note that key members of the team have been moving on, which suggests to me that the status quo won’t hold much longer. Likewise, I don’t get the feeling the assets *will* be worth more in 18-24 months.

      • Mayan Tzolk'in says:

        Rob I support your hunch that the assets will not be worth more in 18-24, in fact I believe they will be worth less. The network is old, single threaded & long overdue for major capex investment. Plus alternate access methods & consolidators will apply significant pressure in the 2 yrs. Dont forget L3 now has significant scale over XO since it’s consolidation with GX & the bad blood between L3 & XO is at an all time high. L3 is still upset at losing the litigation & XO gutting the margins in the market therefore they’ve been kicking XO’s butt this past 12-18 mos on price & service.

        • Grant Lewis says:

          Mayan –

          In speaking with many folks at XO as well as knowing some of the former execs there XO continued its pace of investments at the same rate though slightly lower than when it was public which was about $250M or so annually. To put that into comparison the former Global Crossing invested slightly less than $200 to $250M to manage its extensive fiber network globally so I thinks its safe to say that XO was at least on par and or better than the average investment for like competitors so the state of decline you suggest won’t happen as fast as you anticipate. I would say they could likely do more but i think they have a fairly surprising amount of advance technology investment already occurring that will allow them to remain competitive. In fact XO did demonstrate 100g not too long ago from one end of the country to the next well in advance of L3, VZ, ATT, etc. so its clear they have a decent asset base. Moreover likely the largest ethernet network in the country whereby many of the competitors they compete against for mid market, enterprise customers are in fact buying wholesale services from XO to support their last mile connectivity options.

          I think a reasonable argument that could be made and i’ve suggested it a few times as has Rob most recently
          impacting the ability for the company to continue to see success in mid market and enterprise space thus driving increased enterprise valuation is the impact of the loss of the leadership and talented employees that has occurred over the last 12 months. Its hard to argue with so many senior level execs as well as seasoned employees being allowed to walk out the door to go to work for competitors and or being let go in what appears to be a continuous RIF that XO’s current management team has a challenge in front of them and will likely miss their full year commitment to the BOD. If I were Icahn despite the fact that he doesn’t believe in excessive compensation he needs to figure out how to lock up the last remaining qualified people or his business is going to self destruct as all those posters suggest on the layoff rambling.

          Regardless of the L3 contention that you suggest (and I am not doubting it as i think its clear reading the litigation b/w XO and L3 that L3 was miffed with the IRU / fiber agreement loss) these assets are valuable and i would be will to bet that they are worth more to L3 than they suggest given all the synergies associated to the asset, customer and similar product sets. The telecom industry is one of scale and reach … the more scale and reach the more valuable and i think XO is nicely positioned in NA to allow some other competitor enhanced scale and reach. In fact if i were Dan Caruso i’d take a run at XO for its large metro/long haul network and combine it with the current Zayo assets which would make for a compelling twist on increasing the valuation altogether.

          Finally one could suggest the current management team and its only a matter of time before XO is sold. Given the continous stream of folks departing as is the case most recently with some more senior level engineering folks one has to wonder if Carl’s prepping for a sale sooner rather than later. But in the end i think he’s going to sit on XO for another year until his new Concentrics unit starts to drive healthy margins so that when he does sell he will do so with an asset base more valuable that just XO fiber/wholesale/smb business.

  • ex-XOer says:

    Some good points made above. It just seems difficult to believe that a sale is not on the immediate horizon for a few reasons. One, given the defection of so many “good” people, why wouldn’t Icahn or the BOD step up and try and stem the bleeding? Why let so many top folks go? And why wouldn’t you hire a kick-ass exec team if your true interests were tied to long-term success? Instead, they keep “promoting” from within which basically tells us that either they can’t find any real talent that wants to work there, or they don’t want to spend the money to hire real talent. The folks they’re promoting aren’t really prepared for the positions they’re taking on (which isn’t really the goal of CI anyway), but are eager to get the titles and experience (and why wouldn’t they?!?!).

    Two, why no PR? The only info you ever hear about XO are negative: exodus of management, poor working environment, little to no culture, “inept” management teams, and dissatisfied workforce. Even a cheap PR firm (you know CI wouldn’t pay for a decent one) could do a little bit of spinning. What do we hear? Nada. Nothing about customer wins, strategic partnerships, etc. Is this normal for CI-run companies, does he not believe in PR?

    Three, why doesn’t CI or SOMEBODY come out from XO and provide some semblance of leadership?!?! Most reasonable people are going to continue being confused as to the direction of this company because NOBODY in real power (CI) has come out and provided a different, reasonable explanation of what their end goal is? CI spoke to the company once since he bought it. That was to the management group back when he bought the company.

    The folks there have lost all faith in leadership and the company. They are there to collect a paycheck while they look for something better (or hope that PE buys them so they can keep their jobs). This company is currently constructed to “maintain” until they get sold; nothing about XO exhibits a desire to thrive and truly compete in the industry. A new logo/website is whipped cream on sh*t.

    • Mayan Tzolk'in says:

      Well said – couldn’t agree more. The entire leadership team is unqualified & or designated as interim CEO, CFO, GC CIO, Pres CCS sans EO. EO has the skills just severely handicapped by incompetent peers & self dealing ownership. What a waste of assets; physical & people-there are still a lot of good people & talent there that care about their; team, job & are stuck for one reason or another. It is very difficult to find new employment in a depressed economy & a consolidating industry, more people chasing fewer jobs.

    • Xo imploding says:

      ex-Xo, completely agree. Icahn’s lack of communication is just another example on why this co failed. Even the Board has no idea what he wants to do with Xo. Xo’s last gasp was the extremely feeble attempt to make Xo a Top 100 company to work for which was just more BS propaganda from the Leadership. One City Director told me that he was informed to tell his employees that Starbucks coffee was going to be supplied in the office. 1 year later, no starbucks!

    • Grant Lewis says:

      Good comments. For the record we agree Icahn will be selling XO … we just disagree on timing.

      My feedback to your comments are as follows:

      1/ Icahn won’t pay the $$ to afford a kick a$$ exec team. Just ask any capable recruiting firm out there and they will tell you. All the former execs realized he isn’t providing equity so they likely decided to exit quietly and expeditiously. You are 100% correct that the execs that are left are incompetent / inept and or incapable (perhaps all three) of doing anything with the assets except cut additional costs from it. In fact i have a theory that when he does sell he will have stripped all investments and capability other than bare bone services by having the CFO act as the CEO – why else would you put a CFO in place?

      2/ XO has used Reputation Partners up until recently. Apparently in April they launched a new purple logo/brand campaign … someone commented it appears to be a close proximity to BT … but i don’t see the connection on possible acquisition though i wouldn’t dispute a foreign PTT being a likely acquiring wanting to re-enter/enter US. Quick glance on press releases it appears about 7 since January, and two webinars around security and enterprise SIP. I’d say its a cheap alternative to traditional print but advertising/pr for sure.

      3/ Great question .. I agree but doesn’t this reinforce the lack of leadership ability of the current team? For a guy who is worth as much as he is it appears he’s playing poker … except I can’t tell if his hand is loaded full of face cards or royal flush … either way i think the end is within 18 months.

      To your point on the folks losing faith in leadership … based upon what i know you are 100% accurate.

      As an aside, if you have some time … read the sworn affidavits pertaining to the R2 litigation. Interestingly enough you can glean some interesting tid bits about his investment and subsequent take outs from the unclassified documents.

      • On timing, I’d put it like this: Icahn will very, very likely put it on the market by this autumn, but the question is whether anyone will meet his initial price. If not, then he’ll surely hold on until either someone does meet it or reality changes his mind about the value.

        • Grant Lewis says:

          I agree w/ timing … IMO he’s always been shopping XO around to see valuation but historically it was to give him necessary due diligence on what to do to take final control to take private.

          I’d be surprised if he takes a penny less than $1.5B but i suspect he is looking for $2B. Remember he doesn’t need to sell it as he can just sit on it further. And for the record I still believe he is launching Concentrics to have it increase the value towards $2B mark which might take 12 months to 18 months.

  • Deal in the works? says:

    The near sighted moves we have witnessed recently suggest that there is a buyer is at the table and they are close to a deal. If that is not the case, then the people running XO are much less competent than we give them credit for.

    • I expect nothing at all to happen for at least four weeks. After that, it all depends on Icahn’s whim. I’m not sure the people running XO even know themselves just what that will be.

  • YourGuess says:

    No one. no even Icahn knows what exactly will happen until the last minute. Remember he was a world class chess player & he’s waiting for the opponent to make the next move. I agree with DITW? there is a transaction being worked & the mgt is either clueless as to it’s nature or they are playing the tightest lip game of their lives – hard to tell but I suspect the 1st is the case.

  • captain clec says:

    XO, XO, XO….for years all we hear about is how they will be sold, but low and behold lets take a look at the competitors who have been aquired: USLEC, Paetec, Cavtel, AT&T, Focal, Telcove, Broadwing, MCI, One Comm, Global Crossing, etc…etc…XO has a good niche and they make for great conversation but reality is Uncle Carl keeps everything close to his vest and no one really knows!

    • Grant Lewis says:

      I have to admit I am perplexed. I thought we would have heard something by now …. But nothing. It has to do with IMO the bad economy … Icahn likely isn’t getting what he wants so he will just sit on it. I would.

  • Grant Lewis says:

    Btw wouldn’t it be funny if Zayo swoops in and takes XO? Now that would be really interesting.

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