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The Rumors Were True: Verizon Buys XO

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.

Verizon 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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#verizon #xocommunications #mergersanacquisitions #ma

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