|[June 17, 2014]
ATLANTIC-ACM Releases Level 3 - tw telecom Deal Analysis
BOSTON --(Business Wire)--
ATLANTIC-ACM today released the following analysis of the Level 3 - tw
telecom deal. Members of the press are free to quote with attribution.
Level 3 - tw telecom Deal to Create New "Major Player" in Business
By Charlie Reed, Director of Quantitative Analytics, ATLANTIC-ACM
Level 3 announced the planned acquisition of tw telecom for
approximately $5.68B in a cash and stock transaction.
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 (News - Alert) 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 fla
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 (News - Alert) 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 (News - Alert) 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 (News - Alert)/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 (News - Alert) 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.
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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