Does Akamai Have XO in Its Sites?

Includes: AKAM, XOHO
by: Tech101

There are heated discussions about the issue of owning the network or not by a pure CDN player like Akamai (NASDAQ:AKAM) in the face of the recent downgrade by Goldman Sachs:

Beyond valuation, we are also concerned about intensifying competition as private entrants proliferate and selected large network operators begin to eye the space…

A large CDN without owning networks may in deed lose out like those facility-less CLECs, which all disappeared along with the phasing out of the Unbundled Network Element Platform (UNE-P). At least, with easy reasoning, the lack of its own network support may keep Akamai a niche player and limit its future growth.

Building a national fiber networks takes time and needs expertise. Buying an existing one seems to be more realistic. There are only seven nation wide carriers left after the industrial consolidation, however. Among the seven, the only carrier that fits AKAM's scale and within the reach of its cash hoard and strong stock price is probably XO Communications (OTC:XOHO).

However, the big question is whether Carl Icahn – the billionaire investor and XO's Chairman, who also owns 59% of the stock and 90+% of its debts is willing to sell the company at any thing under $2 billion. Considering XO's $1.43 billion revenue and the $108 million EBITDA (improving), plus a minimum $100-300 million recurring saving from business/operation synergy by both companies under this specific merge, the price is not far away from the unconfirmed rumor that LVLT offered $3 billion for XO without success after LVLT paid $1.4 billion in early 2007 for Broadwing – a carrier with about $900 million revenue and near zero EBITDA. This wild guess neither includes XO's $3.3 billion accumulated NOLs (net operating losses), which alone may save the acquirer more than $1 billion in tax payment, nor its wireless business unit - NextLink, which owns the largest LMDS portfolio in the nation. LMDS is a hot commodity currently because it offers a viable vehicle for backhauling of the upcoming 4G mobile communication.

Forget about XO's current stock price, which was down more than 80% during the past year purely caused by the illusive dilution, possibly forced by Carl Icahn at the cost of minority shareholders in a long shot.

Akamai's $6+ billion valuation may look more reasonable with its profit increase and revenue doubled after the imagined merge. There is even a guess that if AKAM announces a merge/acquisition with XO tomorrow, the stock may jump 10-20% like what happened when LVLT announced the Broadwing buy-out.

Disclosure: The author does not have position in AKAM, but is long XOHO.OB.