According to a recent Reuters report, U.S. telecom behemoth Verizon Communications Inc. (VZ - Free Report) received regulatory clearance from the U.S. telecom regulator, Federal Communications Commission (FCC) for the $1.8 billion deal to purchase XO Communications Inc.’s fiber-optic network. Notably, the FCC had allowed Verizon to enter a lease to use XO Communications’ wireless spectrum licenses for 5G deployment.
This deal is expected to expand the telco's metro and on-net fiber as well as millimeter wave wireless spectrum holdings in several major markets. The deal was announced in Feb 2016 and is expected to close by the first half of 2017.
Meanwhile, Verizon awaits approval from state regulators in Pennsylvania and New York.
XO Communications Buyout Prospects
Verizon has a nationwide wireless network for 4G LTE and plans to launch the faster 5G technology in 2017. Hence the XO Communications acquisition will help the company offer cable TV and Internet services with 5G connection, at 20–50 times higher speeds of 2–5 Gbps (gigabits per second).
XO Communications operates as a fiber-based IP and Ethernet network consisting of 20,000 route mile intercity network in the U.S. and Canada. The network covers 85 major metropolitan markets in these countries offering data transfer speeds of up to 100 Gbps. The company also operates 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 1.2 million fiber miles. XO Communications’ network of 26,000 miles of fiber-optic cable stretches from Seattle to Miami and New York to Los Angeles.
The XO Communications acquisition will help Verizon serve three of its main domains: Business services, consumer FiOS and as a backhaul for its upcoming 5G wireless services. The takeover will also help Verizon fortify its foothold in the data center interconnection market. Additionally, it will bolster Verizon’s cell network density and in turn mobile backhaul network. The acquisition of an expanded fiber-based network will help the company compete with major Ethernet service providers such as Level 3 Communications Inc. (LVLT - Free Report) and Comcast Corp. (CMCSA - Free Report)
Recently, U.S. telecom operator CenturyLink Inc. (CTL - Free Report) decided to acquire Level 3 Communications in a cash-and-stock transaction. Total deal size is approximately $34 billion, including debt. The equity value of this deal stands at roughly $25 billion. The combined entity is expected to be major threat to other telecom operators. Hence, the buyout of XO Communications will likely help Verizon gain a competitive edge and maintain its business momentum.
In addition, XO Communications’ fiber assets will allow the company to enhance its dark fiber-based solutions for its small cell network. The densification of cell network will significantly help the company install and build its upcoming 5G network. Sprint Corp. (S - Free Report) is also strengthening its dark fiber-network for small cell wireless backhaul. Verizon has estimated that the XO Communications takeover will result in operational synergy of over $1.5 billion in terms of net present value.
Verizon currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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