The Rumors Were True: Verizon Buys XO

February 22nd, 2016 by · 48 Comments

Verizon’s heavy hand landed on the US communications M&A landscape today.  The wild rumors turned out to be mostly true, although with a twist.  The incumbent and wireless giant has signed an agreement to purchase XO Communications’ fiber-optic business.

xo-network-mapVerizon will be paying $1.8B for XO’s fiber-based network business.  They’ll be using the assets to help further the company’s cell backhaul network while targeting operational synergies with a net present value of some $1.5B.  But Verizon is not purchasing the LMDS spectrum that was said to be its main interest.  Not yet anyway.  For now they are leasing that spectrum with an option to buy the rest sometime before the end of 2018.

XO operates metro networks in 40 major markets with more than 4,000 on-net buildings and 1.2m fiber miles.  Their intercity network spans 20,000 route miles connecting 85 cities, and is mostly based off of fiber on the original Level 3 backbone.  When they were taken private 4.5 years ago by Carl Icahn, their revenues were in the $1.4B range with EBITDA margins in the low teens, but a lot of water has passed under the bridge since and it’s hard to tell what the numbers might be like today.

Just why an incumbent telco that has spent most of its effort on wireless and FTTH in recent years decided to acquire a CLEC that had needed a new home for a decade is still rather unclear to me.   I rather doubt XO goes to all that many places that Verizon’s network fails to reach, and XO hasn’t spent all that much effort on bringing towers on-net relative to others in the space.  I’d have expected them to do the inverse — buy the spectrum with an option (if anything) on the fiber.

Verizon has indeed been talking about using spectrum in the LMDS bands as part of its 5G plans, but it doesn’t actually need it yet.  Perhaps what we have here is a cheap way to guarantee they can acquire that spectrum at a reasonable price in a few years if the 5G technology really plays out that way, without committing to anything except a bunch of network integration.

As for what this may foretell for the long beleaguered  employees at XO might face, I rather doubt the integration with Verizon Business will be a walk in the park.  If that $1.5B NPV of synergies doesn’t include extensive headcount reductions, I’ll be rather surprised.  On the other hand, Verizon knows rather more about owning this sort of asset than Carl Icahn ever demonstrated, even if it is from the ILEC perspective.

It may take a while to get started though, since Verizon will need regulatory approval.  I suspect they’ll have no trouble getting it, but because they are an incumbent it will take longer than the 3 months or so it might have taken another acquirer.  Verizon expects to close during the first half of 2017.

Carl Icahn’s statement:

“In 2001, I began purchasing the senior debt of XO, and the following year the company filed for bankruptcy. I then worked diligently with other stakeholders to keep XO alive, and in 2003 the company emerged from bankruptcy. The following thirteen years were a bumpy road for XO, as well as other telecoms, as we reckoned with major network overcapacity and other issues caused by overly optimistic projections and capital expenditures made by previous owners. In fact, we had to inject additional capital into the company several times over those years to keep it operating. Although this sale to Verizon does not represent a significant annualized return on our investment, we believe that in today’s environment it does represent the best achievable outcome for the company’s customers, employees and owner.”

And so it goes.

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Categories: CLEC · Fiber Networks · ILECs, PTTs · Mergers and Acquisitions

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48 Comments So Far

  • schmuckinsurance says:

    I stand corrected as well. Anyone know what it means for the life of the remaining L3 backbone strands?

    • Rob Powell says:

      A few years only when it comes to that IRU. But Verizon has no desperate need for that fiber, so they can probably negotiate with Level 3 from a position of strength. Level 3 would be crazy to pass up further revenue for what is no longer new fiber in this case.

      • Anonymous says:

        That assumes LVLT doesn’t want to reclaim the assets for itself

      • xxo says:

        XO’s fiber on the L3 routes is theirs for its useful lifetime. Space and power terms in L3 collos and shelters will be up for renegotiation.

      • notrom says:

        Shortly before the closing of the approval process for the GLBC acquisition by LVLT, Icahn filed an objection. He withdrew the objection about one month later .
        I believe Icahn traded the possible delay for a renegotiation of the LVLT/XO fiber deal !

        Nothing has ever been announced .

  • What happens with the Lawsuit now? says:

    What was XO valued at win Icahn to them private and screwed the shareholders?

    • Rob Powell says:

      There was so much untraded preferred stock, it was always unclear to me. However, it was significantly less than $1.8B.

      • en_ron_hubbard says:

        The EV associated with the Icahn purchase in 2011 was c. $1,140 million which obviously included the value of all the wireless spectrum as well as the npv of the NOL to Icahn’s group. It would be very interesting to know the option price on the wireless spectrum, but I can’t find that in the public material and no SEC filing has yet been made.

        Perhaps you have some market info on any trading value for this type of spectrum?

        So, he paid $1.1 billion and just got $1.4 billion, and he keeps the spectrum and has no doubt exhausted the NOL in his consolidated group. If so the value of that asset (which was owned by the XO shareholders) has been about $600 million in tax savings. Icahn’s statement in the PR regarding modest gain in simply BS and obviously made in the context of continuing litigation.

  • MM says:

    Lvlt has wireless ldms and other assets purchased as part of Telcove merger in 2006. Someone needs to get info on XO rights to LVLT network that will transfer to VZ.

  • mhammett says:

    Assets in the hands of Verizon and other incumbents are assets wasted.

  • Anonymous says:

    VZ also has long term Dark fiber with Level 3 acquired thru Genuity, seems they now have options to consolidate VZ XO IRU decreasing renewals, colocation etc. Or use MCI long haul and turn down all IRU or they may even own the asset thru XO aggrements. In any event VZ has some synergy savings and Level 3 has some revenue hit just not sure how impactful.

  • toddforthree says:

    There were three companies who were screwed by net neutrality before the new law went into effect. lvlt, ccoi and xoxo. each of those companies was a provider of long haul bits to the cable/ilec circuits. now there are two. seems like this is not a bad thing for lvlt.

    i believe lvlt gets 3% a year or so in fees to maintain the xoxo lh fiber. i dont see this as a big hit to lvlt.

    long ago i researched the fiber deal with xoxo and when or if lvlt could buy it back. i wish i could give the board an answer on how that plays out but its still a mystery to me.

    i predict this page goes on for at least a year like the old xoxo posts did

  • Anony says:

    Wait till VZ finds out how much repair and capital is needed to actually utilize some of XO’s under built, improperly built, damaged, over utilized and out dated assets. My bet is VZ allow much of that unusable infrastructure to go dormant.

  • davidrohde says:

    You know I’ve read XO’s announcement a dozen times and I can’t figure out what it means for retail businesses that actually buy services from XO. Are they being sold to Verizon or not? There’s nothing on XO’s website to indicate that at all. And yet Icahn’s statement makes it sound awfully like he’s selling the business. Can you all tell?

    • Rob Powell says:

      At the price of $1.8B, it sure sounds like it has to be the whole thing except the spectrum.

      • Anonymous says:

        Which begs the question, why structure the spectrum under a lease agreement? The conventional wisdom on this board and elsewhere was that spectrum was the primary asset making XO worth acquiring to begin with.

        Given the option to buy, perhaps this little sleight of hand is for regulators’ benefit?

        This isn’t be the first time Verizon gobbled up additional spectrum while artfully avoiding the spotlight for doing just that.

        Am I imagining things?

        • Anonymous says:

          My guess would be the lease let’s them work on spectrum now, while they work through approvals. Once merger complete, then they have ok to complete spectrum buy. Don’t complete the merger and buying spectrum off the table….just guessing since it’s likely an all or nothing sort of deal

  • mm says:

    Level 3 bought Genuity…not VZ.

    Also, any xo fiber purchase back in 1998 was a 20 year iru, that has to be renewed and paid for again. This is what cogent is dealing with on its patch work IRU network that was bought mostly out of bankruptcy on the cheap but now must be renewed at real fair value rent.

    • xxo says:

      XO doesn’t have some rinky dink IRU they have to re-up every 20 years. McCaw cofunded the Level3 build. That fiber is theirs. The space to house the gear to light it and the power to turn that gear on are another story.

  • bebbers says:

    It is posted on XOs web page. Sounds like all is going to Verizon except for Spectrum. That will not happen until 2018.

  • Just another voice says:

    Well, maybe the long running alternate bitch and rumor thread will be allowed to die a slow death. In reality, Icahn had several chances to sell XO to a wide variety of others. In some of that time there were NOLs remaining that were apparently worth more than selling the business. It was always about the financial value of the business to Icahn though, which is the root of the other grievances from those who wanted to build a telecom business. It was, in reality, a carrier vehicle.

    The net of all this is the high stakes game with VZ and ATT on wireless and enterprise businesses will continue. This is just a small step. And many other mid size companies will lose an option, or a leverage point. And a few thousand more telecom workers will unfortunately become consolidation statistics.

    And there is one more point, XO had a vibrant Agent community with a significant revenue stream. What Verizon decides to do with that matters to the industry. Will Verizon take advantage of a vibrant channel, and reclaim some credibility they squandered when they destroyed MCI’s indirect channel vehicle, or will this be another dark chapter? Time will tell, but we all know that those Agents are going to protect their customers, and their own interests. They perform a valuable and needed function in the market, and they will survive whatever bumps are placed in their path.

  • Anonymous says:

    Laurinda Pang needs to run Verizon next………. Gary Breuninger can be her CFO………

  • Grant Lewis says:

    I can’t help but wonder if Icahn enterprises hadn’t lost 1/4 of its overall value in 2015 due to failed bets on energy and icahn himself hadn’t lost around $5.9B on the decline in his investments if he would still be holding onto XO. There’s more value in these assets that could be extracted. Perhaps not selling the LMDS but rather leasing it with option to sell to VZ gives him that vehicle to extract value next year.

  • davidrohde says:

    Thanks for the discussion everyone! If you want to see how we at TechCaliber Consulting (business user procurement consultants) analyze all this for the wireline enterprise WAN services marketplace, please see my latest blog post: “The Verizon-XO deal is about everything except the customers”

  • Dave says:

    This can only be a win-win. XO is SO poorly managed, replacement of management from the top down can only help.

  • denny says:

    XO – Crappy benefits, terrible hours, idiot managers. What’s not to like? :^)

  • Anna Cox says:

    I returned from linkedin well done on an excellent social media campaign

  • Anonymous says:

    What happens to XO employees?

  • Denny says:

    Don’t know. There are some nice people working there. Now as far as management goes, I hope Verizon come through like the grim reaper.

  • bebbers says:

    My guess it will be like Level 3 and TW Telecom. Cut the number down and fast.

    • Anonymous says:

      The difference being that Time Warner was a money maker with smart people, expanding, and leading the domestic industry on several fronts… none of the above can be said for XO, which ought to make the shitcanning easier and faster.

    • Anonymous says:

      XO needs to keep people on staff in the interim, so they are leading them to believe they have a job at VZ without making any promises. Lets be honest, VZ has no reason to keep a single person at XO other than a very small handful of ops folks.

      The first to go will be sales. VZ does not like the XO culture. They will want to get rid of that overpaid & under performing poison as quickly as possible.

  • Anonymous says:

    this sentence out of the above announcement tells a lot:

    They’ll be using the assets to help further the company’s cell backhaul network while targeting operational synergies with a net present value of some $1.5B

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