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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