CenturyLink’s deal to acquire Level 3 for $25 billion underscores the ever-increasing value of fiber for wireless carriers, Jonathan Chaplin of New Street Research said. And that could lead to a bidding war for Level 3 among mobile operators and others looking to shore up their fiber assets.
Level 3 boasts “a strong metro fiber footprint” with roughly 34,000 connected buildings, according to a New Street Research report. That footprint alone isn’t enough to support a nationwide densification buildout, but it could play a key role as carriers prepare to deploy 5G networks and technologies.
“This is far from a ‘silver bullet’ for a wireless company – they will need a much more distributed fiber network than Level 3 has in order to densify economically – but it is a start,” Chaplin wrote in a research note to subscribers before the deal was officially announced this morning. “Level 3 is undoubtedly a better asset than XO, which Verizon acquired recently, for example…. Level 3 is an increasingly strategic asset, so we also wouldn’t be surprised to see a competitive process evolve if they are in talks.”
The nation’s largest wireless carrier agreed earlier this year to spend $1.8 billion to acquire XO Communications’ fiber business in a deal that is still pending and that has been contested by Dish Network. XO operates networks in 40 major U.S. markets through 1.2 million fiber miles, and its intercity network covers 20,000 route miles connecting 85 metropolitan areas.
Carriers are looking to fiber to connect small cells as well as more traditional transmitters to improve coverage and increase capacity. Indeed, Jennifer Fritzsche of Wells Fargo Securities wrote recently that 80 percent to 90 percent of wireless traffic travels on wired networks, and that figure is likely to increase as mobile data consumption continues to ramp up and as 5G technologies come online.
“All four national wireless companies should have interest (in Level 3); the degree of interest will depend on the overlap of Level 3 fiber with their existing assets; Verizon, AT&T and Sprint also own fiber backbones that would be entirely redundant with Level 3’s backbone and so would generate the same kind of synergies as in a CenturyLink deal,” Chaplin wrote. “AT&T probably has their hands full, but the other three will at least consider whether they need the asset.”
But wireless carriers aren’t the only players who may seek to outbid CenturyLink for Level 3, Chaplin said. Both Comcast and Charter may be interested in CenturyLink’s assets as they target the enterprise, and tower companies may even consider bidding for Level 3 to expand their fiber portfolios.
“If anything, there are opportunities for the other enterprise players as the integration process in these deals always seem to hit snags,” Chaplin wrote. “There is opportunity cost though – we think cable and wireless companies could create value with Level 3’s assets and capabilities…. After Level 3, there aren’t many good fiber assets left. Zayo is a great asset – it’s just smaller. Cogent Communications is smaller still. Neither of the other two fiber companies have the enterprise capabilities that Level 3 has.”