Level 3 to Buy tw telecom in $7.3 Billion Deal

Level 3 said it plans to buy tw telecom, reaching a deal worth about $7.3 billion, including debt. Tw telecom shareholders will get a 27 percent stake in the combined company, Level 3 said in a Monday news release (http://bit.ly/1siB73h). The deal, set to close in Q4, is unlikely to face major problems in obtaining federal and state regulatory approvals, industry analysts and observers told us. The deal also likely signals the start of a larger trend toward similar deals involving long-haul and metropolitan network providers, analysts and observers said.

Level 3/tw telecom “does not create competitive issues” that would likely lead to rejection, said Gig.U Executive Director Blair Levin, former FCC chief of staff under Chairman Reed Hundt and more recently ex-head of the National Broadband Plan. Level 3 is predominantly a long-haul network provider, while tw telecom is predominantly a metro network provider. “They're not competitive, or if they are it’s a really small part of the deal,” said Recon Analytics analyst Roger Entner, who has done work for carriers. Level 3 and tw telecom “probably have a case for actually enhancing competition against larger players in both markets,” said Guggenheim Partners analyst Paul Gallant.

Although the deal will make Level 3 more competitive, “it is unclear that it creates a more competitive market,” Levin said. That’s not necessary to obtain regulatory approval, but “it does highlight the challenge for when [an FCC chairman] who says his mantra is competition, competition, competition meets a market whose mantra is consolidation, consolidation, consolidation,” he said. Level 3/tw telecom is “a logical reaction to other deals” like AT&T/DirecTV and Comcast-Time Warner Cable, but is “unlikely to be the only or last reaction to other deals,” Levin said.

Level 3’s network backbone includes 180,000 miles of fiber across 60 countries, so its main competitors “are very large companies, whether they are incumbent telcos or cable companies,” CEO Jeff Storey said during a conference call with analysts. Comcast/Time Warner Cable appears to have been a major impetus behind Level 3/tw telecom, given that the Comcast deal would result in Comcast being able to expand beyond its success with small businesses into the middle-market and large enterprises, said Stephens analyst Barry McCarver.

The new deal may signal the start of a trend of long-haul and metro providers combining “to provide a more comprehensive offering from edge to edge,” Entner said. During earlier phases of Internet traffic growth, “it made a lot of sense to have two companies focus on two different parts of that delivery chain,” he said. “Now, with the whole Internet becoming more mature but still rapidly growing, it makes a lot of sense to put them together.”

Level 3 and tw telecom were two of the most likely network providers to combine with others, but there’s a “boatload of companies” that would also be contenders for future deals, Entner said. “There quite a few long-haul and metro providers who would make sense as complementary fits for one another. A lot of that market is being driven by wireless, where you want fiber to the cell sites. Now they can provide long-haul with it, too."

McCarver said he believes Level 3/tw telecom is a sign of increasing consolidation across the industry, rather than just between long-haul and metro providers. Telecom carriers and providers are going to “seek to fill out their footprint so they can be as valuable as possible to small, medium and large enterprises,” he said. “They want to have a network presence in as many markets as possible, so that when it comes to connecting companies with their branch offices, with their data centers, that they'll be in as many markets as possible with those services.”