Dividend Sensitivities Will Shift the US Network M&A Playing Field

February 25th, 2013 by · 16 Comments

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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Categories: Fiber Networks · Mergers and Acquisitions

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16 Comments So Far


  • Walter Scott says:

    I often wondered why every time, when we have board meetings at Berkshire Hathaway, Stephen B. Burke pulls out my chair for me and pats me on the back. 

    Rob, I think you may be on to something. 😉

  • en_ron_hubbard says:

    Re Comcast– given the mature nature of the consumer cable and broadcast operations, both with somewhat limited growth, the business services side of the business is an important growth driver.

    Not many folk have focused on this but the business sevices segment– until now focused on smaller enterprise customers– has grown from $220 million in revenue in 2007 to an estimated $2.3 Billion in FY 2103. Most of this has been organic (I recall only one acquisition) and they have become a real national player in the space. In this segment they are eating many people’s lunch– taking revenue from the incumbents and the CLECs.

    This organic growth has been relatively cheap compared to the cost of acquisitions and I would expect them to continue to grow it rather than buy it unless they decide to jump upstream to a larger customer base, and want to bring on the systems, expertise, etc for dealing with larger multi-site business. A long shot right now, but if they do then TWTC would be a “safer” play than LVLT with all the attendant foreign revenue (where Comcast doesn’t play).

    • re: twtc being safer for Comcast, that’s precisely what I was referring to. It doesn’t put them deep into the wholesale or international markets, but comes with exactly the right type of more advanced enterprise services they might want to move into in the next phase.

      • en_ron_hubbard says:

        We often agree and that’s how it should be. One other point on Comcast– how many other business service providers do you see rolling out national TV spots for their product? They are serious and when they decide to move upstream they will be a serious competitor.

        • Anonymous says:

          What about XO for Comcast? They are another operator that is focused domestically. Sprint wireline and Cogent seem like they would both be good fits as well (assuming Sprint wants to sell).

  • ABC says:

    Why would Crowe & Co. want to sell when they have a perfectly run ponzi scheme in essence for themselves.

  • Anonymous says:

    carl,

    could you please answer bizarro-carl – your boy ABC?

    thanks,
    the rest of us

  • CarlK says:

    ABC is a stooge and MISCREANT and if he keeps these insults up I will make an effigy of him in my woodshed and DO THINGS to it. Also, if it is a ponzi scheme it is stupid to think they are KEEPING IT TO THEMSELVES because I am sharing in it and I am not cheap FOREIGN LABOR. Am I? LOL IMO. Was thAT CLEAR ENOUGH you focker?

  • CarlK says:

    “Ever can’t help but think you’re surrounded by idiots?” DAMN RIGHT!, and Telecom Ramblings has fast become prima facie. Carl Munger knows these things.

    http://rt.com/usa/intelligence-stanford-years-fragile-531/

  • CarlK says:

    Prima facie what? Prima facie proof, of course. Work the stock lower in order to steal shares with your network of miscreants because “SEQUESTRATION” is scary business! LOL, YOU SOB’s!

    It is true; however, that I could lead SALES higher than what owners have had to endure to date even if I went in with an all OUT PRICE WAR to accomplish my goal of eliminating certain competition.

    http://finance.yahoo.com/mbview/threadview/?&bn=31b5b7b6-1bc0-3a15-8c3c-602c6ce6489b&tid=1361816417545-5e63bb4b-d9a8-4bda-8594-59b1313e2f60&tls=la%2Cd%2C0%2C3

  • ABC says:

    Speaking of idiots…some might say hanging on to a money losing, cash burning, pos company for years would qualify as being one.

    • CarlK says:

      LOL IMO. SOME might say, you SOB, that coming from a money losing, CASH burning, pos PERSON like you that that is FUNNY,
      You keep insulting my baby and stealing SHARES on the short SIDE then I will take ACTION. CHARLIE once told me that I was an example of THE dunning klieger effect. WHATEVER that means I AGREE you focker.

  • MarlK says:

    Yes agree. Zip skip was bing to WIP! MERCENARIES! Skilled LABORERS at night! Cary Grants Wing tips don’t have to cover. Ill see two dogs in the morning if this flight takes SCRAP! HOPE this ship crosses sea…

  • CarlK says:

    It’s about time someone learned how to talk like me. I’m still on my Zayo medication, that I take (3) times a day, and that is on the Level – Over and Out.

  • MarlK says:

    LOL ; ) Its all in fun. By the way if you sold CarlK for president shirts I would be the first to buy one. Maybe Rob will let you post a link. 🙂

    • CarlK says:

      GOOD , THE first thing I would do as President is expand our terriTORY both north and south. Get rid of that cheap Canadian LABOR and then install CHARLIE as King of Mecxico. I would ban short selling in all my territories and move wall STREET to Saskatchuen and….. damn, LOST my train of thought again. LIMO

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