Cowen: Comcast's new business services unit could prompt purchase of Level 3

Comcast Business' (NASDAQ: CMCSA) creation of a new unit focusing on large businesses has raised speculation that it could purchase Level 3 Communications as a way to gain a national fiber footprint.   

According to a Cowen & Co. report written by analyst Colby Synesael, and cited by Forbes, the service provider's agreements with other cable operators such as Cablevision (NYSE: CVC) and Time Warner Cable (NYSE: TWC) gives it a less risky way to prove out the business case for the new unit.

"The current arrangement the company has struck with various cable companies creates a low-risk (albeit low margin) way to gauge enterprise interest and for the business unit to prove to the rest of the organization that it can be successful before investing more meaningful dollars," Synesael said in the report as cited by Barron's.

Synesael added that given the expense of building its own nationwide network, the service provider could purchase Level 3 or Zayo to immediately gain those assets, a key element that will enable it to respond to large business customer's needs.

"As such we believe its current plan will ultimately prove to be an intermediary step with the company either pulling back or wanting to own a nationwide fiber network," Synesael said. "Assuming the latter, we believe building a nationwide network itself would prove too costly/timely and thus would be highly likely to acquire to which we continue to believe Level 3 is the most likely option with others including Zayo also possible."

While it's still early in the game, Comcast Business' push into the larger business segment could pose a greater challenge to AT&T (NYSE: T) and Verizon (NYSE: VZ).

In its last U.S. carrier Ethernet leaderboard, Vertical Systems Group reported that Level 3 surpassed Verizon in the domestic Ethernet market after it completed its acquisition of tw telecom.

"The move is clearly negative for AT&T/Verizon although both companies have deemphasized their enterprise segments in recent years and the Street already has low expectations," Synesael said. "The move is also likely to be viewed as negative for competitive providers like Level 3 as Comcast is intending to cut in on the market share stealing opportunity they are already going after although we caution the pool is very big and is unlikely in our view to have a notable impact. Lastly, we believe the announcement supports our long-held/long-term view that Level 3 is likely to be acquired by Comcast as we believe ultimately Comcast (and perhaps Charter) will look to compete against AT&T/Verizon across all facets of their business which also includes wireless, while AT&T/Verizon are starting to compete more aggressively on the video side of things."

For its own part, Level 3, which has continued to ramp up its enterprise business, isn't afraid of Comcast Business.

Jeff Storey, CEO of Level 3 Communications, told investors during the recent Goldman Sachs Communicopia conference that the company could be a potential partner to Comcast Business by providing network domestic and even international network connectivity solutions.

"As they want to expand their abilities outside of their regions, we view that as a good opportunity for Level 3, whether it's in access, connecting long haul, dark fiber and then also going globally," Storey said.

For more:
- Barron's has this post

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