So believes the Cowen and Company telecom team headed by Colby Synesael. “We do not believe Verizon is recommitting to its wireline enterprise business but rather will use XO’s fiber as the basis to which to build out some of its own small cell networks outside its current Northeast footprint where it lacks fiber assets,” the analysts said in an investors’ note yesterday. “We believe small cell networks are going to be a critical component of 5G network topology and while Verizon will continue to use third-party small cell providers such as Crown Castle/Zayo in some markets, it will want to build out its own network in areas where it is economical to do so. While the fiber assets to which XO owns are predominantly of the long-haul variety the company does have metro fiber in the majority of NFL cities (40 total), of which we estimate approximately half have decent coverage/density and it is in these markets where it could be feasible to use such fiber as a starting point to which to build a small cell network from.”
The analysts also believe “the spectrum optionality is a key aspect of this deal and ultimately why Verizon is willing to pay what we think is a premium to what others such as Level 3 would have been willing to pay. Specifically, we believe Verizon intends to use the spectrum as part of its 5G network assuming the spectrum remains a licensed band and is included in the 5G standards. From a timing perspective we’d also point out that the 2018 option to buy the spectrum from XO lines up with when we should have better visibility from a standards board perspective on how the LMDS spectrum is going to be part of 5G.”
The analysts added that they “would not be surprised” if at some point after the deal closes Verizon looks to sell the fiber assets to which it doesn’t use for its own small cell network purposes along with XO’s revenue to another party and retain the spectrum optionality. “By doing so Verizon would have created a relatively cheap way in which to get access to sizable spectrum (91 LMDS licenses, 9 39 GHz licenses) that could become increasingly important/valuable in the next few years and helped reduce its network costs which we know is an important focus for the company going forward.”
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