Verizon Communications has agreed to buy XO Communications’ fibre optic network business for US$1.8bn – a price tag the target’s chairman and sole shareholder Carl Icahn said “does not represent a significant annualised return on our investment”. Separately, Verizon will lease available wireless spectrum from XO, with an option to buy these airwaves by year-end 2018.
Verizon Communications (NYSE:VZ) has agreed to buy XO Communications’ fibre optic network business for US$1.8bn – a price tag the target’s chairman and sole shareholder Carl Icahn said “does not represent a significant annualised return on our investment”.
Verizon, which received financial advice from Citigroup and legal advice from Debevoise & Plimpton on the long-rumoured deal, said in a statement that it will acquire XO’s fibre-based IP and Ethernet networks, helping it to better serve enterprise and wholesale customers. The fibre facilities will also help the telco to densify its wireless network with small cells.
Separately, New York City-based Verizon will lease available wireless spectrum from XO, with an option to buy these airwaves by year-end 2018. XO took financial advice on the transaction from Evercore and legal advice from Thompson Hine.
Verizon’s shares were up 0.41% to US$51.07 on the New York bourse at the close of trading yesterday, when the deal was announced.
Verizon said it expects to receive several financial benefits from the transaction, including a step-up in the basis of the assets, and operating and capital expense savings. It also expects operational synergies of more than US$1.5bn.
The deal is scheduled to close in the first half of 2017, subject to regulatory approvals. Until these are obtained, XO will continue to operate independently.
Icahn said in a separate statement that “although this sale to Verizon does not represent a significant annualised return on our investment, we believe that in today’s environment it does represent the best available outcome for the company’s customers, employees and owner”.
He explained that he began buying the senior debt of XO in 2001 and, the following year, the company filed for bankruptcy. He then worked with other stakeholders “to keep XO alive” and it emerged from bankruptcy in 2003.
“The following 13 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,” he said, adding that he and other stakeholders had to inject capital into the company several times during this period to keep it operational.
Impact on fibre market
Wells Fargo analyst Jennifer Fritzsche questioned the impact of the proposed deal on other fibre network providers, noting that Verizon is an important customer for both Level 3 Communications (NYSE:LVLT) and Zayo (NYSE:ZAYO), buying long-haul and metro fibre connectivity as well as other products.
“While Verizon will seek to leverage XO’s existing fibre to provide wireless backhaul and enhance surprise/wholesale offerings, we believe there are ample opportunities for other fibre operators that have nationwide networks and dense fibre footprints,” she said.
In her view, Verizon will still need to buy metro fibre from Level 3 and Zayo as it works to densify its wireless network with both small cells and centralised radio access network (C-RAN) as XO’s assets are too small.
XO’s 33,000 route mile fibre footprint is much smaller than Level 3’s 207,000 route miles and Zayo’s 110,000, she noted.
In terms of long-haul, Fritzsche explained that XO has a long-term contract with Level 3 for some 16,000 miles of inter-city fibre, at least parts of which are expiring in the coming years.
She said she believes XO’s network is not big enough for Verizon to use as a nationwide option, adding that the network providers with the largest backbones, particularly Level 3, would be well placed to capture this new business.
