Verizon acquires XO's fiber business for $1.8B, feeding enterprise services, wireless backhaul efforts

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Verizon (NYSE: VZ) is acquiring competitive provider XO Communications' fiber business for $1.8 billion, giving it an expanded network to deepen its Ethernet penetration while satisfying its small cell and wireless backhaul needs.  

Buying XO's fiber makes sense for Verizon on a number of levels.

By acquiring XO, Verizon will be able to address a broader range of enterprise customers with traditional lit fiber services like wavelengths and Ethernet.

XO currently operates metro networks in 40 major U.S. markets with over 4,000 on-net buildings and 1.2 million fiber miles. The service provider's intercity network also spans 20,000 route miles connecting 85 cities.

Being able to tap into those expanded facilities not only takes one competitor out of the market, but it makes Verizon more valuable for large business customers in that it will have more of its own fiber to provide Ethernet in more markets.

Having the expanded fiber assets could also enable Verizon to regain or at least come close to regaining its Ethernet service lead over Level 3 Communications. Level 3 surpassed the telco on Vertical Systems Group's U.S. Leaderboard following the completion of its acquisition of tw telecom.

While Verizon has a sizeable fiber footprint, it can't reach everyhwere so like other providers fulfilling large multi-site enterprise requests it has to rent fiber from other provdiers and this deal helps to fill some of that gap.

"We also lease a lot of fiber outside our footprint for our enterprise business,  Bob Varettoni, a Verizon spokesperson, in an e-mail to FierceTelecom. "We constantly evaluate all the options for fiber – build, rent, acquire – and these assets presented an economic way to acquire some of the fiber we need both for cell densification and for Verizon Enterprise Solutions."

Verizon continues to see gains every quarter with strategic services like Ethernet, a trend that continued into the fourth quarter of 2015. However, a number of secular and economic challenges contributed to a 3.3 percent decline in total business revenues. The telco reported $3.2 billion in Global Enterprise sales, down 3.3 percent year-over-year from $3.4 billion in fourth quarter of 2014.

Verizon can also potentially offload wireless backhaul costs it pays to other fiber providers outside of its wireline territory to satisfy its wireless densification projects, including small cells. The service provider has been an advocate of dark fiber-based solutions for its small cell network, and this deal could potentially give them more of those assets to leverage.

As Verizon continues to carry out its network densification process, the service provider has been vocal about its desire to have dark fiber for small cell backhaul, a trend that its main competitor Sprint (NYSE: S) is now advocating.

"We believe owning a fiber backbone will have significant benefits for VZ's wireless network," said Jennifer Fritzsche, managing director of the equity research group at Wells Fargo Securities / Wachovia Securities, in a research note. "The fiber footprint will help VZ densify its cell network and leverage XO's fiber footprint to more cost-efficiently deploy wireless backhaul and fronthaul for C-RAN (centralized radio access network) applications."

The acquisition shouldn't be much of a surprise. Rumors were already swirling that Verizon wanted to acquire XO for its LMDS spectrum holdings, which it could use to provide an alternative wireless backhaul source.

Instead, Verizon will lease XO's LMDS spectrum with an option to buy it before the end of 2018. XO has 102 LMDS licenses in 28 GHz and 39GHz bands.

Varettoni confirmed that XO's spectrum covers bands it can use to conduct 5G testing.

"This is spectrum in bands we can use for early testing on 5G in some markets, so we intend to lease spectrum for R&D purposes," Varettoni said.

After meeting customary regulatory approvals, Verizon expects to close the acquisition in the first half of 2017.

For more:
- see the release

Related articles:
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XO takes success-based approach to on-net fiber buildouts
XO invades CenturyLink's turf by extending fiber into 100 Salt Lake City buildings
VSG: Level 3's tw telecom acquisition helps it surpass Verizon in Ethernet race

This article was updated on Feb. 22 with additional information from Verizon and Wells Fargo.