Who Might Buy Verizon’s Enterprise Assets?

November 9th, 2015 by · 16 Comments

On Friday, Reuters put out an article citing sources that Verizon is looking to sell off its enterprise assets. Specifically, that would mean both the cloud/data center stuff and the global networking business it has run since buying MCI Worldcom. If such a sale actually were to happen, it would be one of the biggest shifts in the world of telecom and internet infrastructure since the dot-com crash.

But who might actually buy it? The list isn’t very long, as there are only so many with both the interest and the resources.  Some thoughts on the usual suspects:

  • Comcast – They are probably the only Cable MSO ready to take on something like this. They have expressed interest in cracking the large enterprise market, and this would take them all the way there in one inorganic lunge. They have the resources to make it happen, and unlike Verizon, they really like the enterprise biz. It’s easy to like something you’ve been growing at a 20%+ clip. But would they be willing to take on all that baggage and history when the organic route has worked so well at the smaller side of the enterprise equation? I’m going to say yes, if the price were right they’d do it. But I rather suspect the two companies would have trouble coming to agreement on that price.
  • Level 3 – They probably have the most possible synergies and the most overlap of any strategic buyer based in the US when it comes to buying Verizon’s enterprise assets. While their integration history has been, let’s say, colorful viewed over the last 10 years, they have learned a lot and probably have more experience than anyone in what would be needed. They could also probably raise the money to make it happen. That being said, it would be a big risk at a time when Level 3 no longer needs to take the sort of risks it used to take when chasing the scale to service the debt it came out of the dot com era with. They’d have to look seriously at it, but again, I suspect that agreement on a price would be tough.
  • International buyers like NTT, Orange, Teliasonera – I rather suspect that Verizon’s big US federal contracts would make it a bit more difficult for an international player to buy the company. But that doesn’t mean they wouldn’t try. Each would have significant synergies to derive internationally, and each would instantly gain heft in the US markets. However, they’d have to want it more than any of them seem to make the leap.
  • CenturyLink – Since they have no wireless business, staying in the fiber and data game is necessary for CenturyLink. They have been rumored to be looking to sell their own data center business, but the option to gain scale through the purchase of Verizon’s can’t be ignored. It is said they already talked about this and didn’t make the move, but such negotiations could be restarted easily enough. CenturyLink would have less of a culture difference to overcome, and could find the international networking business interesting as well. That being said, it doesn’t feel like they’d be too eager to try.
  • Zayo – After so many acquisitions and so much inorganic growth, one can never count out Zayo’s appetite.  In this case, however, I think Dan Caruso and crew would probably do more than merely hesitate.  All their acquisitions have been about underdeveloped assets, and of all the words one might use to describe the assets of Verizon’s enterprise business, underdeveloped isn’t one of them.  That being said, one could argue that now that they have that very efficient, fully national asset base and a foothold in Europe, buying vast amounts of large enterprise revenue to integrate onto it could be an interesting thought.
  • Private equity – This is, I think, the easiest option to envision happening. The idea of taking Verizon’s enterprise business off of Verizon’s hands and re-shaping it in the mold of its smaller but more dynamic brethren would have to appeal to the private equity guys who have watched Zayo and other infrastructure players redefine the space. On paper, it would have to look like a pretty interesting way to put money to work.

And what might a buyer face? For a strategic buyer with a global networking business of its own, this would be the mother of all integrations, the biggest and messiest we have seen. Even the original purchase of MCI Worldcom wouldn’t match up, as Verizon at the time didn’t have that much parallel infrastructure. The assets to be integrated are fully global, has a full spectrum of legacy and state of the art assets at all layers, and a portfolio of pretty much every service and product that is still being sold. There would be tremendous synergies possible, but it would not be a project anyone could possibly take lightly. For private equity or a strategic buyer with less overlap, the challenge would be to do more with the business than Verizon has managed to. Forcing change on the existing organization from the outside might be a pretty difficult project though.

But like we have seen with Sprint’s wireline business, finding a price that both can agree on may be very difficult.  Having that network as their own has value to Verizon’s wireless business, and to do more than talk about things and actually monetize it will take a pretty good price tag.  And I’m not sure any of these potential buyers will be on the same page.

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Categories: Fiber Networks · Internet Backbones · Mergers and Acquisitions

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16 Comments So Far

  • davidrohde says:

    Thank you Rob for this excellent rundown. I agree with your list of what would be very prospective buyers, and I also agree with the key ultimate sticking point of price way down the road. This deal is not ready for prime time, but the fact that the discussion is out in the open shows the pressures that Verizon is both under and is reflecting back to the marketplace.

    The valuation illogic that people within the enterprise side of the industry, including everyone on your list, do recognize but Wall Street doesn’t is especially notable when you consider the comparison with Sprint. On paper it would take $45-$50 billion to buy Sprint when you add up their debt and equity but is worth no such thing in the real world. It’s known that Sprint tried to sell Nextel but failed (so they shut it down), tried to find a buyer for wireline but failed (because Sprint wireline unlike Verizon enterprise isn’t worth anything to anybody), and tried to find a buyer for the whole company but failed (so Softbank is pretending to be interested again and Mr. Son is “buying a house in Kansas City” – yeah right while preparing to lay off $2.5 billion worth of human & other resources). Meanwhile Reuters appended a mere $10 billion number to Verizon enterprise, which is impossible to believe that VZ would ever accept just by virtue of its major enterprise accounts – that’s merely a fifth of the new money they had to raise to pay off Vodafone!

    Perhaps that’s really the biggest news of the Reuters “exclusive” – how these comparative valuation numbers are playing head games with the entire telecom industry and customer relationships. More to come on all this, I’m sure.

  • schmuckinsurance says:

    I spoke with someone on Wall Street who claimed the ebitda whisper was $2bn, so a 5x multiple which is 1/2 to 3/8 of the pure plays which speaks to the decaying nature of that asset. On a set of rails different, there is defn value there but I would care much more about getting the commercial terms exactly right then worrying about whether or not I overbid by $500mn.

    • davidrohde says:

      Sure, but one of the tensions here is how logical is it to discount VZ’s multiple when so much of inherent value of the account relationships is owing to their presence in both wireline and wireless.

      It’s not widely recognized but one of the reasons for Sprint’s decline is that they started pulling away from types of wireline business too early, even on something as prosaic as POTS LD voice. While this would no longer be true, 5 years ago you couldn’t leave an enterprise hanging with no bid on “boring” toll minutes (including especially inbound) and just go after the juicy new stuff. But that’s what Sprint did, not recognizing the diverse needs of enterprise and, crucially, their multiple strategic business units. (Many if not most enterprises are agglomerations of mergers & acquisitions – just like telecom carriers!)

      There’s a reason we call them the “Big 2” now – sometimes it seems it’s even harder to get competition in big-company wireless than wireline, simply because of Sprint’s loss of “share of mind” and credibility OVERALL. Of course there’s also the fact that they never because a CLEC and sold off their ILEC operations, leaving them essentially no last mile ownership to leverage and “average out” in national bids.

  • Blahtelecom says:

    The 10 billion evaluation was a combination of the Verizon business network(mci,worldcom,mfs networks) and the former terramark company. So the enterprise was the 8. Billion dollars. Two separate companies that can be sold off at anytime to separate entities and wouldn’t affect Verizon. Verizon doesn’t even understand what they have in the two businesses. They don’t want it but don’t want to let it go for a cheap price either.

    • davidrohde says:

      “… and wouldn’t affect Verizon.” I cannot agree with that part. Major enterprise accounts would be disrupted by this change. It doesn’t mean they couldn’t manage it but it would be an issue. The corporate WANs that enterprises run over Verizon wireline are a serious matter to them, so if they also have Verizon wireless (which is likely if for no other reason than most companies have some VZ wireless) it would cause some thinking and discussion.

  • Anonymous says:

    Although on the face of it, the obvious fit is LVLT, maybe not for 100% of the customers/assets, but a good portion of it. However, this is no small amount of business. Lest you forget, LVLT’s NA EST business has an annual rev run rate of $4.4b. VZ’s global enterprise business has an annual run rate of roughly $12b.


    Realistically, this is going to take multiple buyers, bidding on different assets/customers. Perhaps LVLT gets an early crack at selecting the assets it wants, but this is way more than they could absorb and manage well.

  • davidrohde says:

    Thanks for the discussion, everyone. Here’s a link to my piece on the matter. I’m a consultant exclusively for enterprise users on their procurement of all things related to networking and telecommunications. It’s from that perspective. http://techcaliber.com/blog/?p=3527

  • Blake says:

    Something that hasn’t come up so far in discussion, but would certainly be relevant:

    If a player like Level3 expressed interest in AS701/702/703, the FCC would certainly have their bit to say. Already 3356+3549 is close to the FCC’s definition of an Internet “monopoly”; adding VZBZ to the mix would certainly raise some federal eyebrows…

    • Anonymous says:

      Blake, that’s an interesting point. There’s a lot of backbone out there, but do agree that much traffic transits through Level 3. If LVLT obtains those backbone assets (assuming they’re part of the sale), it certainly might enable LVLT to charge more for IP transit services, perhaps even opens up opportunity to de-peer some current peers.

      Here’s a very interesting thought that just dawned on me after I read your comment.

      Assuming a portion of these VZ assets are internet backbone (as implied in your comment), does this strengthen VZ’s and other eyeball owning network operators (EONOs) case for net non-neutrality?

      By tossing all the backbone to LVLT (which I can’t say is actually part of the asset sale), VZ will exchange far less backbone IP traffic with VZ. Consequently, post-asset sale, the packet flow between the two carriers will lose much of the traffic balance it previously had.

      This may be a stretch, but thought I’d throw it out there.

  • Anon says:

    There is NO WAY the FCC approves Verizons IP backbone being sold to Level3. Not in the current environment.

    • Rob Powell says:

      Apparently, I must have missed the point at which wholesale IP transit became an uncompetitive market in need of protection…

      While Level 3 carries a whole lot of traffic, I think there are enough backbones out there that could quickly ramp up the competition in the events that prices went up sufficiently to make it worth their while.

      I think the FCC/DOJ would be more concerned with the concentration of the fiber itself, a business which has a much higher bar to get into.

      • davidrohde says:

        I’d agree with Rob’s comment and would add this. It’s fascinating/concerning that most of the conversation here is about Level 3, because from the enterprise customer’s standpoint perhaps the worst possible outcome is Level 3 buying Verizon’s enterprise business. Level 3 is almost close to a pure play enterprise wireline carrier and, good experience or bad, they are now remarkably engaged in most RFPs. (I just wish they’d be more consistent in the quality of their RFP responses, but I suspect that’s coming.) It’s like they’ve supplanted CTL as the No. 3 candidate for large-company business, and what we always need is a STRONG number 3 in any given market to change its competitive dynamic. LVLT buying Verizon enterprise would just make them the new name of the No. 2 carrier, yes perhaps with a strengthened focus, but with no strong No. 3 anymore.

        Fortunately the fact that I think VZ will never do a deal for $10B and wants/expects more will probably price LVLT out of this. But we’ll see going forward.

  • TelecomRep says:

    I left Verizon nearly 6 months ago. I had a very distinct feeling when I left that they were just fed up with the wireline business all together. Managing the installations of these enterprise customers is daunting and I got the feeling they’re pretty tired of the union workers and having to re-negotiate those contracts (whole other debate w/in itself). I felt they wanted to shift to wireless and advertising, and because of this I decided to find a different job. This confirms my suspicions. Very interesting article. I’m not shocked at all by this and it will be interesting to see how this plays out.

    I can’t see the FCC approving a deal between Level 3 and Verizon for the backbone network, or any other ILEC. Verizon probably would have to sell these assets off in little chunks to get rid of it all wouldn’t they?

    Somebody gets their data centers…. Frontier buys a few more assets, CL gets some….

    That’s a monster backbone…. Pretty crazy development though!! Wow!

  • davidrohde says:

    You all know that the Verizon CFO has essentially now denied this, although wording it in an essentially “present tense” manner that hardly (IMO) rules out future developments. Besides, we all know that everything in this industry is in some respects on the table. Or near the table. The overwhelming fact remains, as everyone agrees here, that VZ is tilting heavily wireless. Here’s my latest analysis of this for large- company customers, thanks. http://techcaliber.com/blog/?p=3540

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