Analysis of Telco M&A talks: T-Mobile/Sprint with MetroPCS & Century Link with TW Telecom?
Overview:
Is carrier consolidation good for the telecom industry? Yes, if you are the acquiring telco because you gain new customers, a larger service area, potential entry into new markets, better equipment pricing due to higher volumes. and less competition. No, if you are a consumer or any other player in the telecom eco-system (with possible exception of the vendors of the acquiring company).
In the past week, T-Mobile made an offer for wireless pre-paid carrier MetroPCS, while Sprint’s Board was to meet to decide whether or not to do likewise. Meanwhile, Century Link was reported to be in buy-out talks with TW Telecom.
DealReporter (owned by the Financial Times/ Pearson Group) wrote that network operator Level 3 Communications also had interest in acquiring TW Telecom, but balked at the high price tag.
Analysis:
1. Metro PCS is being courted due to its very successful pre-paid business and it’s LTE network and smart phones. T-Mobile and MetroPCS have stated their commitment to a merger, but with the union far from finalized, Sprint is reconsidering whether to make another bid after it’s failed attempt to acquire T-Mobile earlier this year.
Bloomberg earlier this month reported that Sprint’s stock was trading at twice the value it was at in February, putting Sprint in a nice position for an acquisition. Piper Jaffray analyst Chris Larsen, telling Bloomberg Oct. 5 that a deal between MetroPCS and Sprint would “just make sense.” Data from Kantar Media suggests T-Mobile and MetroPCS could be a strong pairing—and a problem for Sprint—since T-Mobile has been successful at attracting away customers from Verizon and Sprint while MetroPS has been attracting away AT&T subscribers, There also seems to be very little potential overlap of the two carriers subscriber bases.
2. TW Telecom is one of the three largest providers of Business Ethernet (AKA Carrier Ethernet or Metro Ethernet) in the nation, with fiber to more commercial buildings than any other competitive carrier. TW Telecom operates a nationwide fiber-optic network and provides high-speed Internet connections for business.
“TW Telecom’s equity is more attractive than CenturyLink’s, and the rural telecom operator would likely have to pay a steep premium to acquire the fiber-optic network operator, the second industry source continued. A TW Telecom acquisition, however, would bolster CenturyLink’s enterprise and small business services and support its past acquisition of Savvis, the two industry sources said.”
http://www.ft.com/intl/cms/s/2/927a80c0-0bfe-11e2-8032-00144feabdc0.html
There are at least three reasons CenturyLink might be interested in acquiring TW Telecom:
1. A large installed base of business customers (mostly SMBs, but a few large accounts). The company has a broad market reach into 75 markets and
2. A huge nationwide fiber optic network with over 28,000 fiber route miles–75 percent of which are in metro areas. TW Telecom has 16,000 on-net buildings connected to its fiber network. That would enable CenturyLink to expand the reach of its own growing Business/Carrier Ethernet footprint and connect many more customers to cloud services offered by its Savvis unit. Savvis is one of the few cloud service providers that is actually leveraging its managed IP VPN to deliver cloud services. They presented at the 12 Oct 2011 IEEE ComSocSCV meeting with ppt presentation available for fee download at: http://www.ewh.ieee.org/r6/scv/comsoc/ComSoc_2011_Presentations.php (scroll down to Oct 2011 meeting and you will find Savvis as well as other presentations there).
3. Profitability–unlike a number of other CLECs, TW Telecom is actually profitable. Driven by sales of Business Ethernet and IP/VPN services, TW Telecom reported that total revenues in Q2 2012 grew 1.6 percent sequentially over Q1 2012 and 7.7 percent year over year. The company had $1.4 billion in revenue in 2011.
What do you think of these two potential telco M & Adeals and about carrier consolidation in general?
For more information about the two targeted companies, please contact this author.
Addendum: On October 6th, it was announced that:
tw telecom inc.has been awarded two contracts with the U.S. Department of Health and Human Services for secure Internet connectivity worth approximately $11.67 million over five years, the company announced.
Under the terms of the competitive awards, tw telecom will deliver Ethernet Internet Services and 10 Gig wavelength services for mission-critical and health-related data connectivity to the National Institutes of Health, Centers for Disease Control, Food and Drug Administration and Indian Health Services in Washington, D.C., Atlanta and Albuquerque.
Both contract awards require tw telecom to deliver private, secure and scalable network connectivity transmitting mission-critical medical data and communications traffic, the company said.