The effects of month’s surprise dividend cut by CenturyLink and the market’s response are still reverberating throughout the wireline side of telecom and fiber. In fact, it feels to me as if the M&A playing field may have shifted materially.
On one level, CenturyLink’s move to shift its use of free cash flow from dividends to stock buybacks, debt repayment, and driving strategic growth could give the company more M&A firepower. However, the market’s visceral response took such a big bite out of their stock price that it seems unlikely they would dare. And the likelihood of a stock deal for fiber assets trading at a higher multiple in the neighborhood of 10xEBITDA is lower now as well. Hence, the rumored tw telecom deal of last October seems increasingly unlikely, as does my own speculation of a deal for Sprint’s wireline division.
Likewise, while Windstream is a very different company with its hybrid CLEC/ILEC footprint and didn’t shock the market, the fact that reinforced their commitment to their current dividend suggests they have less flexibility now when it comes to following up on the PAETEC deal. Windstream was a likely candidate to bid aggressively for assets like Integra Telecom or perhaps TelePacific if the opportunity arose, but now? Strategically it might still be their best move, but shareholder support for spending on fiber currently looks too weak to let them make a big move.
And then there’s the publicly held competitive network operators, many of which are focusing internally. Cogent actually *boosted* its dividend and has publicly said that current sector valuations seem too high to them for M&A and is looking at a lower rate of expansion capex going forward. This from a company that built much of its business off of asset purchases after the dot com bubble. Meanwhile, tw telecom seems to have no interest in inorganic expansion currently, planning to continue its organic growth drive. And while Earthlink has frequently been mentioned as a potential buyer (especially out west), the current phase of their intended transformation looks like one in which M&A is less likely for a while.
On the other hand, the M&A hand of the privately held fiber operators and the private equity guys behind them is growing stronger. Zayo is always hungry and could strike at any time to fill in the few holes it has left in its national footprint. That goes almost without saying after the company’s past six years of steadily rolling up fiber assets.
But in light of the Lightower/Sidera deal there may be another parallel national fiber axis forming. And it has multiple paths forward here if that is the case. They could compete with Zayo for regional assets like FiberLight or team up with Integra Telecom and its backers. Or, with CenturyLink and Windstream off defending their dividends, Lightower/Sidera could even become a vehicle for private equity to make a real play for tw telecom. The Northeast has long been tw telecom’s weakest region, and the asset combination plus the potential for a wider base of both wholesale and enterprise growth would be formidable. I think that it would be far easier for private equity to pull off such a deal off right now than for CenturyLink, simply because they have a better understanding right now of fiber than the public markets do and fewer people to prove it to.
And while Level 3 has been looking more overseas, the winding down of the the Global Crossing integration, lower costs of borrowing, and a depleted field of larger buyers in the US might give the company a chance to make a move on XO or Cogent – both thorns in the company’s wholesale side for so long. European assets are probably still foremost on their M&A radar, but the network M&A environment in the US is entering a critical endgame right now and they probably won’t want to sit entirely on the sidelines.
And then there’s the cable MSOs, fresh off the regulatory relaxations making it easier for them to bid on competitive network assets. If their traditional opponents aren’t bidding against them, the likelihood that they might finally take a serious look at larger fiber assets goes up significantly. I have even heard some talk of a Comcast interest in Level 3 lately, though it’s still third parties doing the talking and nothing more. Seems like tw telecom would be a better target for them if they’re serious, but who knows. The cable guys are already making big inroads in metro Ethernet within their footprints, and going after metro assets with more sophisticated product sets and expertise seems like a long overdue move.
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