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EDITOR’S LETTER

CARRIER CONSOLIDATION WAS A HOT

topic of conversation at the Channel Partners Conference & Expo in D.C. (see related story). This is not surprising coming on the heels of two major CLEC merger announcements.

US LEC and PAETEC announced Aug. 14 they are merging in a $1.3 billion deal. And, Time Warner Telecom said in late August it would buy Xspedius.

The rumor mill at the show was rampant with XO being the center of some of the buzz. The CLEC, which serves 75 markets and has $1.43 billion in revenue (2005), has been the largest CLEC until the newly announced pairings, which will create companies rivaling XO. Time Warner Telecom-Xspedius will have a combined footprint in 75 markets and approach $1 billion in revenue, and PAETEC/US LEC will have coverage in 52 markets and combined revenue of nearly $1 billion.

With its recent spinoff of NextLink, XOs CLEC asset is groomed for sale. The latest suitor is rumored to be Broadwing Communications LLC. The combo could be another Super Tier 2 player, as Gartners Jay E. Pultz calls them. Earlier this year, he predicted such pairings, saying, With greater economies of scale, such Super Tier 2 companies could better compete against the behemoths of AT&T and Verizon and likely make a nice profit selling at prices significantly lower than their bigger competitors.

So what about Broadwing and XO?

Broadwing has made a string of acquisitions and divestitures over the years, so its no stranger to M&A. The company has a new CEO, Stephen E. Courter, who just signed on in July. The companys second quarter report shows an operating loss. But it also recorded a private placement of $150 million and net proceeds from the sale of convertible debentures, which it might use for costs related to strategic acquisitions.

Could XO be one of those strategic acquisitions? Broadwing, which is nearly a billion-dollar company (2005 revenue was $879 million), is smaller than XO. Together, the companies would top the $2 billion mark, making them by far the largest of the Super Tier 2s.

Whats more interesting is how this pairing impacts the competitive landscape. There are other regionalized pairings among CLECs that are worth noting, including TelePacific-Mpower and CTC/Conversent/Choice One, but crossing that billion-dollar threshold means the emergence of a new class of competitors.

Read more about whats happening with CLEC mergers and how it impacts the channel in our special report (see related story). For continued coverage of carrier consolidation, bookmark www.phoneplusmag.com or subscribe to our weekly e-mail newsletter at www.phoneplusmag.com/enews.html.

KHALI HENDERSON
group editor

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