Standard & Poor’s Ratings Services said on Monday that even though it sees some strategic benefits to Time Warner Telecoms acquisition of Xspedius Communications LLC, it considered the outlook for the deal negative.
Time Warner Telecom announced on July 27 it will buy the Colorado-based CLEC for $531.5 million, including a cash component of $212 million. After the deal goes through, Time Warner Telecom will have about $1.3 billion in debt.
Owning Xspedius provides Time Warner Telecom with entry into additional markets and some longer term competitive advantages, including an improved ability to serve multilocation enterprise customers, according to the ratings company.
“However, given the small size of Xspedius relative to Time Warner Telecom, the acquisition’s operational benefits do not materially assuage our fundamental concerns about the company’s longer-term business prospects, said Standard & Poor’s credit analyst Catherine Cosentino.
Time Warner Telecoms markets will expand from 44 to approximately 75 including the addition of Baltimore, Md., Las Vegas and Washington, D.C. and its on-net buildings will go up from 6,000 to 7,000. Still, in its report, Standard & Poors said its assessment of Time Warner Telecom reflects the risks inherent in competing with larger, stronger incumbents in an industry subject to increasing price competition. The company’s business plan is also characterized by high capital requirements that continue to defer its ability to generate positive net free cash flows. Time Warner Telecom is also highly leveraged.