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Verizon Bags XO for $1.8B

Carol Wilson
2/22/2016
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Verizon is buying XO Communications for $1.8 billion, immediately bulking up its national fiber optic network significantly. The deal fits into a general industry consolidation trend in the fiber optic network space, but hadn't been on the industry radar, per se.

XO Communications Inc. operates a 20,000 route mile intercity network in the US and Canada, reaching 85 major metropolitan markets in those countries with network speeds up to 100G. The company also has metro fiber networks in 40 major cities, and a 13,000 route mile metro network with more than 4,000 on-net business buildings and 1,000 central office connections it claims as unique to its network.

That combination of facilities will enable Verizon Communications Inc. (NYSE: VZ) to quickly increase the capacity of services it can offer business and wholesale customers, while enabling it to compete in the data center interconnection space and -- perhaps most importantly -- to "densify" its wireless networks, with more capacity in more places.

The rise in smartphone and app-driven traffic is making denser wireless networks important today, and the growth of the Internet of Things and eventual arrival of 5G networks will only exacerbate that trend. Acquiring XO, a competitive network operator, which built its national network based on IP transport and Carrier Ethernet services, gives Verizon not only additional capacity but extended reach beyond its existing footprint.

According to Verizon, the deal brings additional financial benefits, including a step-up on the basis of the assets as well as operating and capital expense savings. The latter could stem from reduced need to lease or build out its own fiber in support of wireless expansion. The company claims the net present value of the transaction's operational synergies will exceed $1.5 billion.

Separately of the network purchase, Verizon said it will simultaneously lease available XO wireless spectrum and will have the option to buy NextLink, the entity that holds that spectrum, by the end of 2018. XO's NextLink owns LMDS spectrum it originally planned to use to deliver fixed broadband access to buildings that didn't have fiber. Local Multipoint Distribution Service operates in the 26GHz and 29GHz bands and was intended as point-to-multipoint last-mile technology.

— Carol Wilson, Editor-at-Large, Light Reading

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kq4ym
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kq4ym,
User Rank: Light Sabre
2/26/2016 | 9:56:50 AM
Re: Enterprise Ambitions
An interesting observation that get around unions might be one of the underlying reasons for the move. But, I wonder how much that might save over time anyway. Enough to pay a premiun for a huge buy?
brooks7
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brooks7,
User Rank: Light Sabre
2/23/2016 | 11:37:36 AM
Re: Enterprise Ambitions
I call it the "omni" thing.

Any time there is entertainment with science, suddenly everybody is reasonably expert in all scientific disciplines.

seven
Duh!
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Duh!,
User Rank: Blogger
2/23/2016 | 11:17:22 AM
Re: Enterprise Ambitions
I call it the Fiber Fungibility Fallacy. "Long-haul fiber, metro fiber, feeder fiber and distribution fiber are all fiber.  Therefore, they are the same."  Not.
brooks7
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brooks7,
User Rank: Light Sabre
2/23/2016 | 10:40:24 AM
Re: Enterprise Ambitions
steve q,

XO doesn't do local fiber and has no access footprint.  On top of that, it would now be part of Verizon and the unions would argue that they are still part of Verizon.  Given that Verizon's representative stated what the purchase was for, I am confused why you think this has anything to do with FiOS.

seven

 
DanJones
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DanJones,
User Rank: Blogger
2/23/2016 | 8:25:16 AM
Re: Enterprise Ambitions
The option to buy up 28/39GHz spectrum by 2018 from NextLink is interesting. The FCC is hoping to have a plan for 28GHz use in place by the end of the year. Let's presume that could slip with the election and everything. Even so Verizon could have some ready made spectrum for 5G around 2018 if the FCC changes the licenses so they can be used for more than short-range fied wireless.
steve q
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steve q,
User Rank: Light Sabre
2/22/2016 | 10:13:33 PM
Re: Enterprise Ambitions
This move could be a way out of dealing with the union and push it FiOS network into a company that understand what is needed to provide the customer with the best network. But Xo could just help force Verizon in put out it FiOS network to customer in the Xo area under this deal.
mendyk
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mendyk,
User Rank: Light Sabre
2/22/2016 | 2:00:43 PM
Re: Enterprise Ambitions
Yes, this makes sense in the context of putting together  a more robust infrastructure to handle 5G volumes.
cnwedit
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cnwedit,
User Rank: Light Beer
2/22/2016 | 12:05:52 PM
Re: Enterprise Ambitions
I would totally agree with that statement - this is a cheaper way to build a national network, including long-haul and metro fiber. 

A Verizon spokesman - the only one taking questions this AM - preety much confirmed that thinking in an email response:

"This is a great opportunity for us to deepen and expand our fiber assets nationwide.

-        As we have said repeatedly, we are densifying our cell network as we strike the best cost balance between spectrum and infrastructure.

-        As we densify the network, we have a need for more fiber.

-        We also lease a lot of fiber outside our footprint for our enterprise business.

-        We constantly evaluate all the options for fiber – build, rent, acquire – and these assets presented an economic way to acquire some of the fiber we need both for cell densification and for Verizon Enterprise Solutions."

 

So there you have it, in a nutshell.

 

Carol

 
brooks7
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brooks7,
User Rank: Light Sabre
2/22/2016 | 11:52:55 AM
Re: Enterprise Ambitions
Putting aside all the potential strategic considerations, doesn't this come off as a really cheap way to build the XO network?  If I were Verizon and needed more fiber to say build a national 5G network, I am betting dollars to donuts that I would spend more than $1.8B in doing so.  Now this is probably not the perfect network, but it does say to me that maybe this is a tactical move (buying a network instead of constructing one) instead of a strategic one (offering an enhanced set of services to a broader audience).  It would explain the reason that Verizon can't say much about forward looking strategy, maybe there wasn't one.  I am not saying there is not potential benefit, but this seems like a really smart way to build more fiber.

seven

 
cnwedit
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cnwedit,
User Rank: Light Beer
2/22/2016 | 10:57:18 AM
Re: Enterprise Ambitions
I speculated at the time that Verizon would not move completely out of the enterprise business and that part of what people were seeing - the move out of public cloud and possible sale of large data centers - was more about focusing its efforts on where it could compete and where it has core competencies. I still think that's the case, and this seems to reinforce that. 

Verizon is being very mum on this deal and I'm not sure why. They're saying it's too early to say how the two companies' services will be rationalized, which I guess makes sense, but I would think they should quell some of that talk. 

I also think that since Verizon has sold off large chunks of its local service footprint, it makes sense to buy a fiber optic network with a national base and a strong metro footprint that was built much more recently and is IP-based. 

Sterling, how would you assess what they are buying?
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