Level 3's tw telecom deal is all about scaling its local-to-global service presence

Sean Buckley, FierceTelecom

Level 3 Communications finally broke its purchasing silence this week, announcing its intent to acquire tw telecom for $5.7 billion, a deal that will immediately enhance its ability to serve an even larger group of U.S. and multinational enterprise customers.

News of this deal should not be that surprising. Rumors had been swirling that both Level 3 and CenturyLink (NYSE: CTL) had been potential suitors for tw telecom.

This acquisition comes at a time when enterprise services have become a larger part of Level 3's revenue mix. In the first quarter of 2014, Enterprise Core Network Services (CNS) revenue rose 11 percent year-over-year to $962 million.

When it completes the tw telecom acquisition, Level 3 will enhance its Ethernet and local business service experience. For over six years, tw telecom has ranked as the third largest Ethernet provider in terms of port share on Vertical Systems Group's U.S. Carrier Ethernet Services Leaderboard. It also gains a broad mix of local fiber network assets and a deeper local business presence that had not been a strong suit of Level 3 in the past.

Although it still needs necessary federal and regulatory approvals, the pending acquisition brings potential benefits to both Level 3 and tw telecom's customers.

From a local market network perspective, Jeff Storey, CEO of Level 3, said it will enhance its on-net building presence by gaining access to tw telecom's 21,000 buildings, giving it access to a total of 35,000 "unique" global locations. By gaining access to a larger set of on-net buildings, the combined company will also be able to cut local access costs by reducing its reliance on third-party service provider partners, including the local ILECs.  

Likewise, tw telecom's existing and new customers will get access to Level 3's "local-to-global" footprint, which includes a mix of network and data centers in more than 60 countries and a number of global submarine cable networks.

Larissa Herda, CEO of tw telecom, said that becoming part of Level 3 will enable it to satisfy its customers' growing desire for global connectivity--something that it could not provide on its own.

"A lot of the customers that we sell to have wanted us to do more, which is why we have been doing more and we have been stretching," Herda said. "We don't have a global network and we have a lot of customers who would love us to sell them a global network, so I think from our sales people perspective, they are in a great position."

Michael Sapien, principal analyst for enterprise at Ovum, said in an interview with FierceTelecom that while the real impact of this merger won't likely be seen until 2015, it will bring potential upside to both wholesale and enterprise customers.

"Wholesale customers will see more fiber available in many local markets, especially on the West Coast, where Level 3 was weak," Sapien said. "Enterprise customers, including government, will see more local market support and availability with the additional overlay of metro fiber networks each owned."

Being the service provider's largest deal since it acquired Global Crossing in 2011, the key factor in the success of this deal will be how effectively executives integrate the assets and operations into their larger fold. Concerns about their ability to effectively integrate tw telecom aren't unusual. Earlier, Level 3 had struggled with its integration of the various assets it purchased, such as Broadwing, Progress Telecom and TelCove.

Besides the integration issue, the deal has come under fire from Andrews & Springer LLC, which said it "is investigating whether tw directors are breaching their fiduciary duties by failing to adequately shop the company and maximize shareholder value."

If Level 3 can overcome these issues and a competing bid does not emerge, the new company will establish itself as an even more powerful threat to traditional telcos like AT&T (NYSE: T) and Verizon (NYSE: VZ) in competing for multinational corporation businesses.--Sean