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Straight Talk Telecoms

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On October 31, CenturyLink announced it would spend $34bn to acquire Level 3 Communications. In January, Ovum predicted that "increased M&A activity will impact the wholesale market in a variety of ways." Provided the transaction secures the necessary approvals, it will create a third giant in the North American wholesale market and a significant player in the global wholesale market.

The combination of M&A experience plus complementary assets and wholesale portfolios should create a credible alternative for national and international wholesale services

The combined revenues of CenturyLink and Level 3 from wholesaling their services and infrastructure to intermediaries in 2015 exceeded $5.5bn, similar to that of European telcos Orange and Deutsche Telekom. Furthermore, their combined revenue from North American wholesale in 2015 accounted for about $5.3bn – placing the new entity between our estimates of AT&T's $6.8bn and Verizon's $5.0bn.

Both CenturyLink and Level 3 are the product of a series of acquisitions, some more successful than others. However, as we previously highlighted, Level 3's integration with Global Crossing represented an improvement on its previous mergers, and hopefully this experience will smooth the process of integrating the two companies. M&A activity does not in itself guarantee success for the participants because integrating networks, services, operations, and cultures is an intense and complicated challenge. However, we have observed increased understanding from wholesalers about what it takes to complete a successful integration. Interestingly, the wholesale acquisitions seem to have gone smoother for Level 3, but it is now the acquired party.

While CenturyLink's assets are largely in North America, Level 3 also has extensive infrastructure in Europe and Latin America, plus cable systems linking the three regions. Level 3 has developed much-needed security and content distribution capabilities that will be advantageous to the combined entity's wholesale, government, and enterprise customers.

CenturyLink and Level 3 have not been immune to the impact of competition and commoditization in their wholesale businesses, as demonstrated by both companies' declining revenues from this channel. However, we believe that their complementary infrastructure assets and service portfolios should enable them to weather ongoing turbulence in the wholesale market at least as well as their competitors.

Appendix

Further reading

"CenturyLink acquiring Level 3 to create stronger US player and larger global challenger," TE0005-000867 (November 2016)

"Google and Level 3 interconnection agreement takes bit-mile peering to the last mile," TE0012-000569 (February 2016)

2016 Trends to Watch: Wholesale Telecoms, TE0012-000567 (January 2016)

"CenturyLink sets new channel support standards for wholesaling the cloud," TE0012-000543 (May 2015)

"Level 3 to acquire TW Telecom," TE0012-000508 (June 2014)

Wholesale Case Study: CenturyLink Builds a National Wholesale Carrier, TE012-000458 (October 2013)

Wholesale Case Study: Level 3's Integration of Global Crossing, TE012-000465 (August 2013)

Author

David James, Practice Leader, Wholesale Telecoms

david.james@ovum.com

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