Why Level 3 ought to buy Global Crossing

I have written a few times now that Level 3 would be a natural suitor for Global Crossing once Level 3 works past its current integration issues.  But I have never really explained why, so I thought I would lay out the argument in a blog post.  I’ll give details in a moment, but  it all comes down to this:  GLBC is strongest where Level 3 is weak, and Level 3 is strongest where GLBC is weak.  Synergies therefore are easy to find.  Now let’s look at it piece by piece:

First the weakest:

• Wholesale Voice – GLBC’s wholesale voice business is about $450-500M/year and at only 10-15% gross margins.  Level 3’s very similar wholesale voice business is $700M/year or so at about 30% gross margins.  Put simply, Level 3’s asset base is much more efficient than GLBC for this sort of revenue and therefore Level 3 could expect to make more money off it than GLBC does.
• Continental Europe – GLBC has simply never reached scale in Europe outside the UK, while things are better now than they were a few years ago the revenue still isn’t impressive.  On the other hand, their network falls almost perfectly on top of Level 3’s European footprint, which means that if they were combined there would be many duplicate routes that could be shut down, bringing the combined revenue onto a consolidated footprint.  Level 3’s European network is currently its strongest division but is small, and this would help it achieve scale.
• USA backbone – GLBC’s USA backbone is essentially 24 fibers on the Qwest network with minimal metro on-ramps.  It has been a source of immense cash burn since its creation.  Level 3 has already integrated networks based partly or entirely on Qwest fiber before, it is a known asset which Level 3 has already incorporated non-overlapping pieces.  In fact, the Qwest network doesn’t go many places Level 3 isn’t already at – the integration would appear straightforward.  Afterwards Level 3’s metro footprint should allow them to attain much greater margins on the revenue GLBC generates in the USA.
• Transatlantic cables – Level 3 and GLBC already share the AC-2/Yellow cable, unifying it can only save money, even if both are already mostly tapped out.

And then the strongest:

• GCUK – The UK division is Global Crossing’s crown jewel.  It generates about 150M on 600M in revenue and even postive cashflow from assets beginning in London but reaching 200 markets throughout the country via the old Racal network.  On the other hand, Level 3’s UK division consists of a large presence in London and some wavelengths to Manchester.  For Level 3, GCUK could be grafted onto their current operations with minimal effort.
• GC Impsat – This South American division is perhaps GLBC’s second strongest division, generating $40-50M in ebitda on $350-400M in revenue.  As with the UK, GC Impsat would just be grafted onto the Level 3 network, giving them a solid entry into the entire continent that already pulls its own weight and has excess subsea cable capacity to support growth.

So you see, buying GLBC seems to have no strategic downside for Level 3.  So why hasn’t it happened?  Well of course, strategic considerations are only part of it.  The barriers are a) financial firepower, b) operational readiness, and c) customer focus issues.  I’ll address those in a followup post.

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Categories: Internet Backbones · Mergers and Acquisitions