Partners Ponder The Possibility - And The Implications - Of An Acquisition Of Level 3

Telecom provider Level 3 Communications is reportedly exploring "strategic alternatives," potentially including a large stock buyout or an outright sale of the company, according to a report published last month by Benzinga Pro. But with second-quarter earnings reports now behind the major telecom giants, some industry analysts and partners are still wondering whether Level 3 is for sale.

Cable giant Comcast was speculated to be Level 3's main suitor in last month's report. Both industry analysts and partners suspected that Comcast could be interested in Level 3's robust fiber infrastructure, a footprint that expands more than 100,000 fiber miles in North America, Europe, Latin America and Asia, and included 30,000 metro route miles and 35,000 subsea route miles.

A merger between the two companies wouldn't come as a surprise because it would "make sense" to bring the two providers together, according to one Comcast partner that requested anonymity.

[Related: Comcast Names Leader For New Mobile Business Unit, Fueling Speculation About Wireless Play]

"I've been continuing to hear about a possible merger, and it seems to be heating up," the partner said. "The prospect of a Comcast-Level 3 merger in my opinion, would create the most powerful company out there."

Level 3's wide-reaching fiber infrastructure could help Comcast compete with the likes of Google and AT&T. Comcast has been busily rolling out fiber to new geographic areas this year. Comcast Business’ Fiber network currently includes more than 141,000 route fiber miles across 39 states and the Washington, D.C. area. In June, the cable giant committed more than $9 million to a major fiber expansion in the Virginia area.

The addition of Level 3’s enterprise networking assets would help Comcast grab more enterprise customers, a segment of business customers that the cable company is actively trying to attract.

During Comcast's Q2 earnings call at the end of July, the Philadelphia-based service provider posted business services revenues that increased 17 percent year-over-year. Growth within its small-business segment currently accounts for 75 percent of its business services revenue and 60 percent of its growth.

During Comcast’s first-quarter earnings call in April, the provider’s chairman and CEO Brian Roberts said that Comcast Business services are also starting to ’bring new competition and choice to midsize, as well as enterprise customers."

Comcast told CRN that the company does not comment on merger speculation. Level 3 did not respond to CRN’s request for comment by publication time.

Level 3, based in Broomfield, Colo., posted mixed second-quarter earnings for the period ending June 30. The provider posted total revenue of $2.05 billion, down 0.2 percent year over year from $2.06 billion, with its Core Network Services revenue coming in at $1.96 billion, up 0.7 percent when compared to Q2 2015 revenues.

Some level 3 partners feel that while consolidation within the telecom industry isn’t surprising, a sale of Level 3 could be premature because the company is making money again.

"Level 3 finally has it together," said one solution provider executive and Level 3 partner that asked not to be named. "They are adding people to the channel at a record pace, and it's really a growing organization."

When asked during its Q2 2016 earnings call on July 27 about the likelihood for Level 3 to become part of a much larger organization in the next few years, Jeffrey Storey, Level 3’s president, CEO and director, said that Level 3 is focused on being an ’acquisitive company’ that will continue to look for its own merger and acquisition opportunities, noting its $5.7 billion acquisition of TW Telecom in 2014.

’With respect to us being part of a bigger organization, I want to be part of a bigger organization, but I want to grow it organically. I want us to continue to grow, satisfy our customers' needs, but we have to remain flexible, we have to remain nimble, because that's how we win. We win by differentiating our experience against these massive companies that are out there,’ Storey said during the call.

While many telecoms are electing to grow via mergers and acquisitions, a possible acquisition of Level 3 from the reigning cable giant seems unlikely, at least in the short term, said Michael Bremmer, CEO of TelecomQuotes.com, a telecom consultancy based in Moreno Valley, Calif.

"It would seem to me that Comcast, being blocked from buying Time Warner Cable, might be an issue since Level 3 is such a huge player in fiber, especially in an election year," Bremmer said.