Tracking the Fallout From the Verizon/XO Deal

February 23rd, 2016 by · 20 Comments

The dust from the announcement of the Verizon/XO deal has had a day or so to settle now.  Let’s ramble on a bit about a few unanswered questions, both from the past and for the future.

LMDS Spectrum – Was this truly the driver for Verizon’s purchase? Does the leasing of that spectrum with an option to buy mean that much to the company’s 5G? If so, what other pockets of LMDS spectrum are out there that have suddenty gone from worthless to valuable? Straight Path Communications is already making a play of it it seems with the former IDT spectrum, I hadn’t even noticed that until yesterday. Level 3 had a pile from the Telcove deal, but one has to invest at a certain level to keep such things according to the rules from the original auction. XO did, I have no idea if Level 3 did the same. But I’m still waiting to see if this new world where 5G needs LMDS will actually materialize.  The fact that Verizon didn’t just buy it outright suggests someone is hedging their bets here.  It could be Verizon that doesn’t want to pay Icahn’s price unless they really need it.  Or depending on the terms of the option it could be Icahn making a bet that there could be a little more blood to squeeze out of this stone if he just waits yet a little bit longer.

Verizon as a CLEC — Until now, Windstream was the only major ILEC that has made a serious effort at competing in CLEC costume in other ILEC territories nationally, courtesy of the PAETEC and KDL deals. Yes, Verizon had the MCI/Worldcom/MFS assets of course, but those were more of an IXC with metro fiber and a large enterprise focus than competition at the SMB and mid-market level where XO has plenty of revenue. What does Verizon do with it, and what do their ILEC neighbors think about it? Verizon’s focus hasn’t been anywhere near the SMB and mid-market for many years, it’s hard to imagine them seeing the XO purchase as an opportunity to change that.  I mean, Verizon *could* use XO as a platform to revitalize its efforts on that front as well as on wholesale.  It’s just that of all the ways I might have come up with for them could choose to do such a thing, buying XO would not have been near the top of the list.  It’s not big enough to move the needle, and it isn’t growing fast enough to add much dynamism.  Of course, I could be wrong about that. We are pleased to present you Top Animation Movies that have garnered millions of views and left even more fans. Come and see our blog with the best movies.  Or they could be.

XO’s intercity fiber – This has long been a point of dispute between partisans of Level 3 and XO. XO’s national fiber IRUs on the original Level 3 network buildout were designed to make them XO’s fiber in every possible legal sense, unlike the usual sort of IRU. They originally had 24 strands and an option on fiber pulled through a new conduit, but during the dot com crash they returned 6 of them in return for lower O&M and such. The exact terms of the deal are now known only to Level 3 and XO, and now presumably Verizon. But the scuttlebutt has for many years been that when they run out, at a time that may or may not be in 2-3 years, Level 3 would use what leverage they have over accessing and maintaining the fiber to bring it back in house or otherwise get it effectively off the market. It had the potential to be ugly, but I think the Verizon deal completely changes the picture. Level 3 didn’t want XO to have it because XO was using it to compete in the wholesale transport space. Unless you think Verizon cares more about that space now than it has in the past decade, Level 3 has every reason to come to some new sort of deal with Verizon. Any additional revenue they can get off of 20 year old fiber is gravy if it doesn’t materially change the competitive environment the way it did in XO’s hands. The fiber adds to Verizon’s diversity, and while they don’t need it moving off it would be a pain, so they’d have reason to deal as well. So if Verizon’s purchase goes through, I suspect this longstanding uncertainty gets resolved over a few beers.  But we will probably never hear about those details either.

The Icahn/shareholder lawsuits – These are in court now, apparently, after years of lawyers doing what lawyers do.  Does this $1.8B deal have any affect on those deliberations?  One can easily argue that between the $1.8B, the remaining spectrum, and the benefit derived from the NOLs elsewhere in his business, Icahn made out like a bandit since he forced minority shareholders to sell to him in 2011.  That’s perhaps why he played down any success with XO since his entry back in the 2002 timeframe in the quote supplied with the PR.  It won’t affect Verizon of course, which of course can afford more lawyers than even Icahn can.  But there are still a lot of people involved in these unresolved soap operas from the past.  Now that XO itself stands to be consolidated, those chapters seem likely to be completed as well.

Verizon’s appetite from here – Verizon buying XO leads inevitably to the followup question: what else might they be hungry for?  Is this a one time thing, or are there underlying drivers that will make other deals similarly attractive to them?  If it’s LMDS spectrum they want, how much do they want to have?  And if Verizon wants it, is AT&T ever far behind?  If it’s fiber assets, which ones were the real targets?  I mean, Verizon hasn’t bought fiber since the MCI/Worldcom deal, and they’ve sold rather a lot of it – albeit entangled with copper.  In fact, they’re still in the process of selling some of it now to Frontier.  I don’t even pretend to have the answers to any of these questions yet.  Thoughts?


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Categories: CLEC · ILECs, PTTs · Mergers and Acquisitions

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20 Comments So Far

  • Anonymous says:

    Verizon has made it very clear that their future is in wireless so the metro fiber and LMDS are the attractions. I would not be surprised if they package the XO customers in with Verizon Enterprise/Business and spin them off.

  • en_ron_hubbard says:

    Regarding the option structure for the wireless spectrum, another speculation would be that Icahn wants to delay so as to more fully use the NOL.

  • Matthew says:

    Nice article that is well researched. Existing XO customers are going to fall through the cracks. These customers will be treated like bastard stepchildren until Verizon figures out what they want to do with them.

  • David Deutsch says:

    I’m more interested in whats going to happen to XO’s enterprise Voice customers. We’ve never seen a merger of Verizon ILEC and MCI/Worldcom CLEC voice (I assume in order to generate recip comp revenue from the entity).

    VBG / MCI have long been mismanaged and ignored groups with high executive turn over.

  • “the only part of the XO business Verizon isn’t currently buying is the spectrum licenses” –

  • ChrisP says:

    This transaction was purely to lower the cost of densification. It is in the public with Lumos, Zayo and others what VZW is spending to implement dark fiber. All of the architectures envisioned for 5G have equipment being centralized. Centralized equipment must talk to the remote radios and in the only way to effectively do that is with fiber.

    They bought all of XO’s spare conduits for pennies of what it would cost to build today.

  • Anonymous says:

    The fallout is easy. Most of the XO peeps will get cut. The XO customers will get rolled to the VzB existing network. This deal was merely table stakes for securing the spectrum later.

    • Anonymous says:

      Worked with Alltel and many were offered new spots. Not so much the management, but most of the techs were offered spots.

    • Anonymous says:

      I would choose the VzB sales force over anyone @ XO every day of the week and twice on Sunday !

      • Anonymous says:

        That’s like selecting dumb or dumber – but I would have to agree. After the way a few people behaved from XO on the thread that shall not be mentioned, I would be wary of any of their employees. They’ve had years now to atrophy and simmer in their angry juices.

      • Anonymous says:

        Many XO employees are former VZ employees that were riffed years ago, therefore you may be pitting same against same! As far as processes ago, XO is nowhere close to being the elephantine bureaucratic mess VZ is…this will not be a pretty union for XO employees…assuming any are left after the merger.

    • Anonymous says:

      Bingo!!! CHEAP CHEAP!!!

  • Anonymous says:

    PS. I been following this place since it was Nextlink, and 90% of the time, speculation on what is going to happen, how it’s going to happen, and when it’s going to happen and to whom it’s going to happen…has been less than correct.

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