Persistence may not pay off for Vodafone

Contact: Ben Kolada, Thejeswi Venkatesh

After three deadline extensions and interest from competitor Tata Communications, Vodafone Group announced on Monday its latest attempt to acquire Cable & Wireless Worldwide (CWW). Vodafone is offering £1bn, or approximately $1.7bn, to buy CWW. However, its offer has already hit a roadblock. CWW’s largest shareholder, Orbis, which owns 19% of the company, has rejected the bid on the grounds that it undervalues CWW. Vodafone initially expressed interest in acquiring CWW on February 13.

Orbis’ argument does hold some ground. Although Vodafone’s offer represents a 92% per-share premium to when the deal was originally announced, it still values CWW below some precedent transactions. Vodafone is valuing CWW at half times revenue and just 2.7x EBITDA for the 12 months ending September 30, 2011. In comparison, US cable company Knology recently sold to WideOpenWest for 2.8x sales and 8x EBITDA, while SureWest Communications was valued at 2.2x revenue and 6.8x EBITDA in its sale to Consolidated Communications in February. For more business-focused comparisons, PAETEC was valued at 1.3x sales and 8.4x EBITDA in its sale to Windstream Communications in August 2011. Level 3 Communications paid 1.1x revenue and 7.3x EBITDA for Global Crossing in April 2011.

Given the strategic significance of this deal to Vodafone, we expect that the company could appease Orbis with a higher bid. We’ve previously written that Vodafone, which is light on its fixed-line capacity in the UK, would likely use the acquisition to enable more bandwidth availability for its mobile users. The UK wireless operator will be able to take advantage of CWW’s vast infrastructure to backhaul its own cellular services, rather than rely on third-party operators. Throughout the wireless industry, cellular operators are increasingly feeling their networks squeezed as users consume more and more high-bandwidth data. Further, with £7.7bn ($12bn) of cash and marketable securities in its treasury, Vodafone could certainly afford a higher offer.

Few targets left in FEO, but are there any buyers?

Contact: Ben Kolada

In the past year, networking vendors have acquired many of the independent front-end optimization (FEO) startups, further narrowing the field in this already niche sector. In fact, there are only a few notable independents left. But is this really a race to consolidate the market, or are acquirers simply adding these capabilities to their portfolios by picking up properties at fairly cheap prices?

FEO focuses on getting a browser to display content more quickly, as opposed to dynamic site acceleration and other services that use network optimization to speed content delivery. For the most part, the FEO segment has been made up of a handful of startups. However, consolidation in the past year took three of these companies out of the buyout line. In May 2011, AcceloWeb sold to Limelight Networks for $12m and two months later Aptimize sold to Riverbed for $17m. Terms weren’t disclosed on Blaze Software’s recent sale to Akamai, but we’re hearing that the price was in the ballpark of $10-20m. That leaves Strangeloop Networks as one of the last companies standing, and its fate is basically secured. After the Blaze deal severed Strangeloop’s partnership with Akamai, the company is likely to find an eventual exit in a sale to remaining partner Level 3 Communications.

Firms interested in entering this sector shouldn’t fret over potentially losing Strangeloop to a competitor. Instead, they should actually reconsider their entry into the FEO market. FEO providers, both past and present, have done little to validate the space. According to our understanding, Aptimize was the largest of the acquired vendors, and its revenue was only in the low single-digit millions. The fact that each target sold for no more than $20m further suggests that the market isn’t yet living up to expectations.

Hosters lose another telco acquirer

Contact: Ben Kolada

In the latest billion-dollar-plus telco transaction, Level 3 Communications has announced that it is acquiring Global Crossing in an all-stock deal worth $1.9bn. (The actual price of the acquisition – the largest we’ve recorded for Level 3 – is closer to $3bn when Global Crossing’s debt is included.) And while the deal impacts the telecom industry by bringing together two well-known fiber operators, in a way it more significantly impacts the hosting and colocation markets by removing yet another potential telco buyer. (We’ll have a full report on Level 3 buying Global Crossing in tonight’s Daily 451.)

Earlier rumors in the hosting and colocation industries had Level 3 as a potential acquirer, perhaps picking up CDN vendor Limelight Networks or hosting company Internap Network Services. These rumors were made more convincing by the growing trend of telcos buying into hosting and colocation. But in their conference call discussing the transaction, executives at Level 3 and Global Crossing put those rumors to rest, saying they don’t expect to announce another acquisition anytime soon. Further distancing Level 3 from the hosting M&A game is the fact that the company doesn’t appear to be too interested in hosting or datacenter services at all, since it chose a target that generates only 5% of its total revenue from these segments.

We previously noted that CenturyLink is likely out of the market as well, following its purchase of Qwest Communications for an enterprise value of $22.4bn, which saddled the company with a mountain of debt (the deal closed April 1). Last year, CenturyLink and Qwest held an aggregate $19bn in debt; that’s nearly equal to the revenue the two companies generated over the same period. Further, that debt load is more than five times the combined company’s free cash flow. Debt repayment obligations will likely put a halt to CenturyLink’s steady M&A activity, thereby forcing the company to focus on organic growth. With CenturyLink/Qwest and now Level 3 focused on integration, we expect that acquisition speculation following the next telco-hosting deal will be somewhat tempered.