Long-Haul Wholesale Field Narrows

The Level 3 Communications Inc. merger with WilTel Communications Group LLC mirrors the industrywide predilection for consolidation, and analysts predict it will help the former rivals land customers neither could get flying solo and, perhaps more importantly, inspire more stable pricing in the wholesale market. It also may mean Level 3 will stay true to its wholesale roots instead of following competitors leads to diversify the services it offers.

The approximately $685 million deal was announced in late October and is expected to close in the first quarter of 2006. The terms call for Level 3 to buy all of Tulsa, Okla.-based WilTels communications business, including the Vyxx video transmission division and the SBC Communications Inc. contract, good through 2009. Level 3 is not assuming any of WilTels debt, and, because of that, Standard & Poors Rating Services says Level 3s credit rating will remain unaffected.

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SBC, which is buying AT&T Corp., is WilTels largest customer. WilTel saw the writing on the wall and deduced that most of the SBC traffic it carried would be moved to AT&T, says TeleGeography Senior Analyst Rob Schult. In light of that, WilTel needed a way to remain viable, and merging with Level 3 achieves that aim, he says.

Still, analysts say they didnt anticipate this particular marriage. I think it was very savvy on [Level 3s] part a little bit unexpected, I think. I guess I thought that they maybe had been looking at others, says Schult.

That WilTel is selling is not a surprise. That Level 3 is buying is, ATLANTIC-ACM analysts echo in a research note.

Unexpected or not, ATLANTIC-ACM says the companies combination sets the stage for a strong player in the wholesale marketplace. WilTel has consistently kept the smaller players very well-satisfied with excellent service, while Level 3 has had slightly more influence with larger spenders, analysts write in a research note. These companies have been competing with each other in the marketplace and now can work together to jointly pursue prized contracts.

Level 3 says its network, once it is tied to WilTels, will reach 50 new markets and include 3,000 new route miles. The underlying provider is especially strong in wholesale bandwidth and IP infrastructure, and plans to bring WilTels IP, optical and voice transport traffic over to its network. Level 3 has indicated it plans to remove as many overlapping network elements as possible, reducing the inventory of lit bandwidth on many routes around the country.

Schult further points out the Level 3- WilTel merger indicates Level 3 plans to stick with wholesale offerings, rather than branching out to offer enterprises platforms such as data storage, as Global Crossing Ltd. and Broadwing Communications LLC have done. Its interesting that Level 3 has not changed tacks, that theyve remained focused on the wholesale services, he says. If they can be the last carriers carrier standing, maybe thats a strategy that will win it for them. Clearly other people dont see that opportunity. But other people dont necessarily carry the volumes of traffic that they do, so I think they can make a go of it.

Another aspect to consider, Schult says, is the consolidation removes one more competitor from the wholesale market to the benefit of pricing. The number of different providers is becoming more narrow and certainly the fewer people you have bidding on any one situation, the less pressure there will be to reduce your price right off the bat, or to match your competitors price immediately, and I think thats very positive, he says.

AT&T Corp.
Broadwing Communications LLC
Global Crossing Ltd.
Level 3 Communications Inc.
SBC Communications Inc.
Standard & Poors Rating Services
WilTel Communications Group LLC

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