Source says RBOC sizing up smaller carrier in wake of MCI snub.
Qwest is reportedly sizing up XO Communications as a possible takeover target, a source says.
Speculation that Qwest might pursue XO and other, smaller service providers surfaced after Qwest lost out to Verizon in its bid for MCI. Observers at that time said Qwest might look to acquire a smaller carrier with nationwide facilities, a focus on enterprise customers and little debt – such as one that has emerged from Chapter 11 bankruptcy. XO and Global Crossing have done so.
A source says Qwest was performing due diligence on XO last week as a precursor to perhaps making an offer for the carrier. Qwest and XO declined to comment on “rumor and speculation.”
Analysts say the union makes sense. Qwest CEO Dick Notebaert has said the carrier would be looking to accumulate smaller assets after losing out on MCI, including those divested by SBC and Verizon as they integrate acquired carriers AT&T and MCI, respectively.
“Qwest has been saying that they would look to collect similar local assets and business customers by buying smaller companies,” says Donna Jaegers, an analyst at Janco Partners. “It makes sense. XO’s got fiber in 37 markets – they have about 3,000 buildings on fiber. They have a lot of collocation facilities with the local phone companies, and they got that by buying Allegiance [Telecom].”
XO last year outbid Qwest for Allegiance. XO has 1.16 million metropolitan fiber miles throughout 40 major U.S. cities, including the 30 largest.
“It’s very consistent with what [Notebaert] said,” says Jeffrey Halpern of Sanford Bernstein, which hosted a conference last week at which Notebaert spoke and reiterated plans to “roll up” smaller assets.
“He has two problems: He has a scale problem and he has an access problem,” he says. “What he said during and following his presentation was that he believes consolidation remains necessary and that Qwest is likely to be an active member in driving that; and that the probable strategy is a roll-up strategy – there isn’t one acquisition that solves the problem. You could assemble a set of assets that could be competitive with an AT&T and an MCI in the enterprise space.”
Thomas Nolle, president of consultancy CIMI, says he has heard the Qwest/XO due diligence reports, as well.
“It kind of makes sense,” he says. “The near-term strategy for them is probably to try to build up their mass and credibility so that it at least looks like they’re trying to be an independent player.”
And of the rumored Qwest targets – XO, Global Crossing, Broadwing and Level 3 – “XO is a lower apple,” Nolle says.
“The only concern I have about XO is that I’m not sure they bring that much to the table. In addition to not having maybe a lot of extra breadth, Ethernet-type services – which is what XO’s been principally known for – isn’t exactly rocket science, and Qwest could deploy it on their own. So I’m not 100% sure what they think they’re buying in the process. They’re just essentially picking up some customers, picking up some data sales expertise in some critical areas.”
In March, XO retained Jefferies & Co. to present strategic alternatives based on, among other things, the competitive environment of the telecom industry, the current regulatory environment, and the recent and pending mergers and acquisitions in the industry. XO says it is considering Jefferies’ report.
Calls to Jefferies were not returned by press time.
XO’s market capitalization is $404 million. Revenue for the first quarter of this year, ended March 31, was $361.5 million, an increase of 39% from the first quarter of last year. Consolidated net loss for the first quarter of this year was $42.9 million, an improvement of $5.6 million compared with a net loss of $48.5 million in the same period last year.
In addition to its metropolitan fiber, XO has an OC-192 IP backbone with OC-12 uplinks in its markets and data centers.
