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ATLANTIC-ACM Releases Level 3 – tw telecom Deal Analysis

ATLANTIC-ACM today released the following analysis of the Level 3 – tw telecom deal. Members of the press are free to quote with attribution.

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Level 3 – tw telecom Deal to Create New “Major Player” in Business Telecom

By Charlie Reed, Director of Quantitative Analytics, ATLANTIC-ACM

Background:

Level 3 announced the planned acquisition of tw telecom for approximately $5.68B in a cash and stock transaction.

Analysis:

If consummated, the deal will have the following impacts on the market:

  • The deal will help both companies compete. tw telecom will add valuable local assets to Level 3’s robust long-haul network, increasing its lit building count by 21,000 on-net units (for a total of 35,000). tw telecom’s dense metro footprint has allowed it to play well with mid-sized local and regional businesses, including entities in the large medical, local government and education segments. (These three verticals account for 29 percent of employees in the U.S. and represent a large opportunity to capture share from the ILECs.) The deal also will help Level 3 compete for contracts from large enterprises as its increased on-net reach delivers new advantages in costs, provisioning and service levels. Those types of advantages, and decades of focus, have allowed AT&T and Verizon to capture significant shares of contracts with large enterprises. (Level 3 has had recent success in capturing large contracts already, and this deal will enable it to compete more deeply for these deals.) On the other side of the transaction, tw telecom will similarly benefit from Level 3’s global footprint, opening up opportunities with customers that have international requirements. Finally, the deal will help Level 3 in the wholesale space, delivering strong metro density that will help the new company capture greater share of the wireless backhaul market.
  • Will integration challenges interfere with the momentum of these players? tw telecom has one of the most consistent networks, visions and strategies in the industry, which has enabled revenue growth every quarter for the past nine years in a flat market for business telecom services. Level 3 has experienced significant growth as well—especially over the past several quarters, logging growth in the North American enterprise financial line item of 3%, 5% and 4% percent quarterly in 3Q13, 4Q13 and 1Q14, respectively. ATLANTIC-ACM estimates the combined Level 3 and tw telecom have grown U.S. business telecom service revenue (excluding data center, cloud equipment and professional services) by 8% from 2012 to 2013 while the overall market remained flat. Integration will create challenges for the new company to maintain this trend. To this point, tw telecom’s growth has been greatly assisted by its excellent business customer service. In ATLANTIC-ACM’s 2013 Business Connectivity Report Card, tw telecom was the highest scoring carrier among companies generating $1B+ in revenue for Sales Reps, Billing, Customer Service, Voice Value and Data Value. Level 3 also scores well with customers, receiving Brand and Network awards in 2013. (Note: 2014 results will be announced next week – stay tuned for updates.) The operational organizations and cultures that enable this level of customer focus will be difficult to maintain through integration and probable layoffs. This said, Level 3 was successful overall with its integration of Global Crossing and has at its disposal the expertise of CEO Jeff Storey, whose deep background in operations will serve it well as the new company tackles these challenges.
  • A new major player. Despite the high profile of this merger, and the new company leapfrogging Windstream to take position as the Number Four player in business services, the combined firms will have a small share (5.2% in 2013) of the overall business services market. (Note that the Comcast/TWC deal, if approved, will have a larger share than Level3/twtc.) AT&T, Verizon and CenturyLink possess a combined share of 59.8%. However, when drilling specifically into more advance services, including Ethernet, VoIP, IP VPN and Dedicated Internet Access (DIA), the combined companies’ share in 2013 would have been 8.9% -- the third largest behind AT&T and Verizon. On the wholesale side, the combined company’s share in 2013 would have been 7.2% -- again placing fourth behind AT&T, Verizon and CenturyLink.

The Bottom Line:

Since these companies do not overlap in network and focus on slightly different customer sets, the merger is not likely to decrease competition. If fact, Level 3 has historically priced very competitively and may bring that perspective to tw telecom markets, driving increased competition. In addition, the combined company will likely make stronger plays in bids for large contracts, placing competitive pressure on AT&T, Verizon and CenturyLink.

At the same time, the acquisition will deliver a significant last-mile access footprint to an operator that historically has lacked a scaled metro footprint, driving OPEX synergies via on-net circuits while also enabling Level 3 to deeply penetrate U.S. metro markets in pursuit of greater business services expansion. In today’s market, the telecom business is a game of scale, and this deal delivers Level 3 the required metro network scale to broadly support U.S. business customer needs, which translates to opportunities to capture greater share of business telecom services revenue.

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About ATLANTIC-ACM

ATLANTIC-ACM is a leading provider of strategic research and consulting services to the communications and information industries. In addition to producing the industry's principal customer satisfaction, benchmarking, and market sizing and opportunity studies, ATLANTIC-ACM assists clients in evaluating business development opportunities for successful investment, market entry and long-term planning. For more than two decades, ATLANTIC-ACM has helped leading companies identify opportunities, capture and retain market share, and navigate changing markets, economies and technologies. For more information, visit ATLANTIC-ACM's website at http://www.atlantic-acm.com.

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