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Level 3 High On Analysts’ Radar for M&A, But Comcast Purchase Pooh-Poohed

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Edward GatelyBig changes could be ahead for Level 3 Communications, with analysts buzzing about possible M&A, including an acquisition by Comcast.

Shares of Level 3 jumped last week after Benzinga Pro reported that the company is reviewing strategic alternatives, from an outright sale to a large buyback. The site also reported that Comcast could be a potential suitor for Level 3.

Level 3 spokesperson Ashley Pritchard tells Channel Partners her company “does not comment on rumors or speculation.”

Oppenheimer's Tim HoranOppenheimer & Co. analyst Tim Horan said Comcast is unlikely to acquire Level 3 over the next few years because it is focused on its consumer offerings, and is more likely to focus on its wireless strategy before it would consider making a major acquisition in the enterprises space.

“We see the company (Level 3) as having four options: Sell itself (likely to a cable company), break itself up, make an acquisition or buy back stock,” he said. “We view an acquisition as the most likely outcome and believe Colt/Zayo are near-term targets, and believe the company has a lot of operational flexibility, which will translate into incremental shareholder value.”

Colt is a London-based multinational telecommunications and data-center services company. Zayo provides fiber-based bandwidth infrastructure services and carrier-neutral colocation. It is based on Boulder, Colorado, with its European headquarters in London.{ad}

Colt would help Level 3 improve its international operations, and a merger with Zayo would bring “meaningful revenue and operating synergies, as well as reduce the capital intensity of both businesses,” Horan said.

“We do see Colt and Zayo as the most likely targets near term, and longer term we believe Level 3 could pursue a breakup into two companies, a wholesale focused REIT and a services company, which would give both companies the flexibility to pursue additional consolidation,” he said.

Wells Fargo analyst Jennifer Fritzsche said she sees Level 3 as more of a near-term buyer than seller.

“In our view, a Level 3 purchase could be strategic in several different sectors, including the telecom, cable and Internet/content industries,” she said. “All of these sectors recognize the importance of fiber in facilitating the growing demand for bandwidth.”

A Level 3 merger or purchase could make sense for a …

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telecom carrier looking to deepen its fiber presence both inside and outside of its network, Fritzsche said. This was the rationale for Level 3’s acquisition of tw telecom in 2014, which complemented its long-haul fiber network with tw telecom’s dense metro fiber and 21,000 on-net buildings, she said.

“Alternatively, certain companies could enable Level 3 to diversify and gain scale in businesses that are not its main focus, such as dark fiber, small cell connectivity or data-center colocation,” she said.

Cable providers could leverage Level 3 to expand enterprise offerings, Fritzsche said. A purchase of Level 3 would allow cable to “quickly scale its enterprise offerings by leveraging Level 3’s 106K intercity fiber route miles and 67K metro route miles,” she said.

In addition, she said don’t count out Internet or content companies. A more “out-of-the-box” suitor for Level 3 could be a large Internet or content company, she said.


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