CenturyLink’s Level 3 acquisition has gotten the approval of the Department of Justice (DOJ), but the requirement that the service provider divest certain fiber assets as a provision of the approval could attract a diverse set of buyers.
According to the consent decree, the combined company is being required to divest certain Level 3 metro network assets and certain dark fiber assets.
On the metro network side, the new company will be required to divest Level 3 metro network assets in three metro areas: Albuquerque, New Mexico; Boise, Idaho; and Tucson, Arizona. The combined company will continue to serve all current Level 3 customers unless they choose to be served by the buyer of divested assets in each metro area.
To ensure there are no service interruptions, CenturyLink will be allowed to purchase some wholesale network services from the buyer of divested assets in each metro area. CenturyLink retains all its existing networks and business operations in these three metro areas and will continue to provide a full suite of telecommunications and data services to residential and business customers.
MoffettNathanson said in a research note that while the metro network assets in these markets are not strategic to either company, a sale could attract a host of competitive telcos and fiber or cable operators such as Zayo, Uniti, Comcast, Verizon and TDS to the bidding table.
“The company should fetch a fair price for the divested assets (perhaps somewhat lower than 'normal' given the sale wouldn’t necessarily include all of the existing revenue) as there are a number of parties that would presumably be interested in bidding,” MoffettNathanson said. “The usual suspects like Zayo and Uniti will surely take a look, as will the local cable operators seeking to augment their commercial offerings (Cable One in Boise, Comcast/Cox in Tucson, and Comcast in Albuquerque), and maybe some other cats and dogs that have picked up assets similar to these in the past (Verizon, Crown Castle, TDS, etc.).”
Dark fiber patchwork
While the dark-fiber sale requirement could potentially bring more parties to the table, it won’t have a big impact on either company’s bottom lines. The consent decree mandates that the combined company divest 24 strands of dark fiber connecting 30 specified city pairs across the country in the form of an indefeasible right of use (IRU), a customary structure for such transactions. Since these fibers are not currently in commercial use, this divestiture will not affect any current customers or services. Like the metro assets, CenturyLink and Level 3’s dark-fiber assets are strewn across various markets, meaning that the potential pool of suitors will be relatively small.
“The routes are a bit of a patchwork; this is not a national asset,” MoffettNathanson said. “Altogether, the combination of conditions and routes winnow the field of potential buyers quite significantly—existing operators with national assets these could be plugged into, and likely an interest in selling dark fiber to best monetize it—and will likely yield a 'sub-market' price for the IRU as a result.”
However, Zayo, which has been expanding its network via organic builds and the purchase of several regional networks, could be a likely candidate for the dark-fiber assets to potentially enhance dark-fiber capabilities.
“The package offers routes in some areas where Zayo has a thin presence, most notably Florida,” MoffettNathanson said. “There would be a bit of a network effect in that it would help to further round out the portfolio of long-haul fiber over which Zayo has the ability to sell dark fiber rather than just sell lit services.”
Regardless of who buys these assets, the sale won’t have a large impact on CenturyLink since the telco does not regularly sell dark fiber to other providers.
“CenturyLink doesn’t actively sell dark fiber today—its quarterly dark fiber revenue is in the $12M range, vs. ~$125M per quarter for Level 3—so the merger was unlikely to really change the market, especially with Level 3’s management set to run the combined business,” MoffettNathanson said. “However, the IRU sale will represent an incremental source of competition relative to the status quo, both for long-haul dark fiber and from any customers that may want to switch to dark, say from a wavelength.”
Closing remains on track
With the DOJ approval in hand, CenturyLink’s Level 3 acquisition still needs approval from the FCC and the California Public Utilities Commission, along with meeting other customary closing conditions.
“We are pleased that the Department of Justice has conditionally cleared CenturyLink’s acquisition of Level 3,” said John Jones, CenturyLink's SVP of public policy and government relations, in a release. “It is an important milestone in our overall approval process.”
CenturyLink moved the closing date of its pending acquisition of Level 3 to the end of October, giving the remaining state and federal regulators more time to complete reviews. The service provider said that the delay will not affect the network and operational integration activities required to bring the two companies together.
In September, the California Administrative Law Judge proposed a decision that recognized the combination of CenturyLink and Level 3 was in the public interest and recommended that the California Public Utilities Commission approve the transaction at its Oct. 12 meeting. CenturyLink said it anticipates that the deal will close in mid- to late October 2017.