Level 3 and CenturyLink??

October 27th, 2016 by · 22 Comments

That's the rumor that hit the markets earlier today. The idea that the CenturyLink and Level 3 could come to an agreement on each other's value is a bit surprising to me, but less so than in the past.  The markets are taking it seriously, as both company's stock prices were up around 10% on the day, though that suggests maybe they aren't sure who is buying who here. But let's take this a piece at a time just to lay the idea out there for thought.

First, what would the numbers look like? As of right now, CenturyLink has a $16.9B marketcap and net debt of around $20B, and it's revenues are in the $17.8B range. Level 3 has a marketcap of $18.65B and net debt of about $10B, and it generates about $8.3B in annual revenue. Combined the two would have $26B or so in revenue and an enterprise value of $65B. That's a big company, but still nowhere near the AT&T's and Verizons of the world.

Now, how about the assets? In terms of longhaul assets, such a combination would put a big fraction of the most recently built national longhaul conduit and dark fiber into the hands of one company. All the big dot com era builders under one roof at last... will regulators notice?  Meanwhile, Level 3's national metro depth would be merged with CenturyLink's incumbent western territories to potentially great effect. And CenturyLink's cloud and data center assets combined with those of Level 3's would be similarly interesting, though with unclear resolution. I say interesting, but what I'm really thinking of is the integration. This would be the granddaddy of network integration projects. There would be plenty of synergies to be had, but a whole lot of sweat would go into extracting them.

And how about the people? Level 3 has 12,500 in its organization, give or take a few. CenturyLink has 43,000. All deals like this would mean layoffs of course, and plenty of them. It has to be that way to make enough synergies to get the numbers to work out. But there would be added complications of the different cultures of the two companies to be sure. And of course, 16,000 of CenturyLink's are unionized.

Do I believe it? I don't know yet.  I mean... the deal could be announced tomorrow, or it could just vanish into the ether like all the rest.  I can't help but feeling there is another shoe somewhere waiting to drop.  Is Level 3 + CenturyLink the final product, or just the means to another end that neither can pull off alone?

Here's one wild speculation for you. Maybe this combination works even better if Google Fiber is combined, with Google as a minority partner but still with a stake and influence and now with real infrastructure expertise to back up the access dreams it has now paused.

Or, if it's wireless that's missing, how about Sprint or T-Mobile USA added into the mix.  Either one, doesn't really matter to the broader concept.

Hmmmm... going to be puzzling this one out for a while.  Both companies report earnings next week.

Categories: ILECs, PTTs · Internet Backbones · Mergers and Acquisitions

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22 Comments So Far


  • FM says:

    “Google Fiber … now with real infrastructure expertise …”

  • mhammett says:

    I thought it was a stupid idea where. I heard it.

  • Dae Yu says:

    “this is the best bad idea we have.” – Argo

    can’t wait to see how this one turns out.

  • Anonymous says:

    who would Run this Storey ? Seems like he will happily runaway with stock and huge payday for frankly doing nothing. Took over a company on the verge of FCF so no credit there, bought TW Telecom give him that as it was somewhat on his watch and aggressively cut cost and people while never increasing organic growth. Not exactly a great job

    Centurylink what is there claim ? they rolled up Embarq and US West assets so really a Rural ILEC and smallest RBOC copper plant with fiber overbuild and of of course the classic Qwest network.

    I suppose the reach into tier 2 -3 markets is attractive to Level 3 and the tier 1 markets of Level 3 attractive to Centurylink along with europe and south america.

    Level 3 already owns more than 1/2 of Qwest LH network. Genuity and Global crossing gave them that.

    Making huge FCF seems to be guaranteed if done and that by itself may be worth it to wall street You cant argue making money.

    I guess this is a purpose leak to entice other bidders to step up. The marriage is ackward while a Comcast would be much easier to understand.

  • Anonymous says:

    This will be a disaster for all of the TW people, they will be let go first and then L3 people, at that point once the integration is complete Google will come in and buy it all.

  • Anonymous says:

    Of course anything can happen, but this seems like a stretch and maybe not well thought out yet. I think there would have to be multiple companies involved for this to actually happen. I highly doubt Level 3 wants anything to do with the LEC business. Now if Google Fiber like what you mentioned or Frontier came in and took the Residential and more regulated business from the core fiber and data center/cloud business that they are actually looking for, it could make sense. It could also help fill in some of the APAC gaps for Level 3, especially in Singapore where Level 3 has been weak. But there would be a huge US regulatory hurdle to overcome and the integration would be a disaster and much more difficult than TWTelecom was, not just because of size, but Centurylink is still running a ton of internal systems I’m not sure they even know what to do with. Level 3 is only just now getting through the network integration challenges. The cost of integration, the cost to split Centurylink, the inevitable churn from clients using both networks for diversity, the regulatory fight seems like a lot of work to simply buy market share and some cloud services. Colt with its KVH assets still seems like a better fit to me. L3 doesn’t need more long haul, they need more metro depth and an APAC network.

  • Anonymous says:

    This actually becomes a multi-faceted deal:

    1.) Level (3) & CL merge – Level (3) gains a much richer subscription base for content delivery – thereby assisting with core revenue growth (something that has stagnated in recent times IIRC) AND avoids the fights of the past (Level (3) v. Comcast anyone?) as well more small to medium business growth/market penetration.

    Should they choose not to retain the LEC (residential) portion, well, that’s what Frontier is for?

    2.) This allows the two of them move into a more media centric play for services (ie. Comcast/NBC, AT&T/DirecTV) – again, speaks to core services revenue growth.

    3.) Level (3) picks up more data center growth/further penetration into those markets to enhance their existing assets.

    4.) Now bring in Sprint – Sprint struggles with having content to share and lags in behind to AT&T and VZW – this gives Sprint the content AND more network to play with (mobile backhaul for FTTC leveraging CenturyLink and Level (3) fiber assets). This puts more cell sites on Level (3)/CL network – thereby making them more likely to pick up more core growth as their FTTC portfolio is larger/more diverse (in multiple senses of the word). Zayo recently won a large contract – wonder what that is doing for their core revenues?

    This also awards Level (3)/CL a wireless arm for being more like the AT&Ts/VZWs of the world.

    5.) Google Fiber – Google Fiber is currently reining in their deployments and scaling down operations – CenturyLink in recent times has started to deploy a FTTH/FTTB network – this complements one another nicely – further metro reach for Level (3), more network for CenturyLink to push FTTH/FTTB, and provides Google with the experience and knowledge when it comes to building access type networks (permitting and the like).

    Again, all conjecture but there may be longer term goals here to be realized that aren’t as obvious (assuming that Level (3) wants to involve itself in the LEC world).

  • Anonymous says:

    Some are assuming Frontier could afford to buy the LEC. They are choking on the debt load from the Verizon transaction and their cost of capital is way too high. Could CTL spin off the LEC? maybe.

    • Anonymous says:

      Maybe Windstream would want the LEC/SMB business? Could work with their westward expansion plans. SLC, Denver, Vegas, Phoenix are all on the expansion list and are CL markets. Pure speculation of course, but Windstream does seem to have new expansion hopes and dreams since offloading CS&L. A lot of their current expansion is outside of the current LEC footprint.

  • Anonymous says:

    Is CL really looking at Zayo?

  • Anonymous says:

    if you wanted a easier integration and similar Tier 1 market capabilities I would think zayo would be a preferred acquisition. I guess it comes down to is motivating CTL , they have a long haul network, they lack Tier 1 fiber presence in most markets outside of US west territory. To me Zayo comes to mind in many companies wish list while it is a mess of acquisitions likley not integrated all that well but product set that is fairly clean and not alot of old legacy stuff to deal with. Cell back haul , dark fiber , wavelength.

  • Anonymous says:

    I think CTL is looking for that merger that would finally shove them over the declining legacy revenue mountain that Q/CTL have been trying to scale for the last 10 years. Level 3 has the scale to do just that. Especially if CTL sticks to their plan to sell the data center assets.

    I don’t think CTL wants or needs to sell the ILEC piece. It has a lot of value for the business segments and is very complementary for any IXC network. Level 3 would benefit from that as well.

    The timing is funny only in the since that CTL leadership wants CTL to be talked about in the same circles as the big two. Now that each of them has a major merger announcement, it figures that CTL wants to make its next move too.

  • Anonymous says:

    $#!tpile 1
    plus
    $#!tpile 2
    = roses
    you’re doing it wrong.

  • Anonymous says:

    as I am sure people are aware the deal is done. sounds like the Level 3 namebrand will be gone and the story over.

    Not sure I am happy with the buyout/merger, there was still so much more this great asset could have done for shareholders. Selling out now is pure disappointment.
    to me

    Although if you stay around a 2.15 annual dividend sounds ok

    • Anonymous says:

      Agreed. But looking at the revenue numbers they really are horrendous. Clearly struggling to grow so cost cutting to a better EBITDA number. Fine for short term but not a great long term strategy. As for Europe that has turned into a train wreck the past 2 years. Be interesting to see what CTL do with that business. Buying Colt is an option which will muddy the waters but won’t sort growth issue quickly.

  • Crawfish says:

    Looks like Denver and Tulsa are in line for some layoffs!! Pass the Tabasco, this is going to be a fun ride!!!

  • If you know of any PRI Project Engineers in St. Louis that have been laid-off, let me know. Same for PBX Order Coordinators in CA. kharwood@wicresoft.com

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