Telco TV

Level 3, Indies Now Takeover Targets

3/10/2006 7:00 PM Eastern

AT&T Corp.’s proposed $67 billion acquisition of BellSouth Corp., announced last week, predictably set speculation rising as to whether it will trigger a new round of acquisitions among competitors trying to match a reinvented Ma Bell’s scale.

If federal regulators sign off and the merger goes through, the new AT&T will claim 9.8 million broadband customers, eclipsing top cable operator Comcast Corp.’s 8.5 million cable-modem subscribers and almost doubling Verizon Communications Inc.’s 5.1 million broadband customers.

While investment houses, including Bank of America and Lehman Brothers Inc., issued conflicting opinions on whether reactive consolidation would occur, there are still several acquisition scenarios.

ISSUES WITH QWEST

With BellSouth now claimed, the only remaining Bell that might be on the selling block is Qwest Communications International Inc. But there are serious questions about its attractiveness as an acquisition.

Debt is a big issue. Qwest generated $13.9 billion in revenue in 2005, but even with steps to reduce its obligations, it carries $14.5 billion in debt, according to Michael Howard, principal analyst and cofounder of Infonetics Research Inc.

Bigger Bell brother Verizon could be a potential suitor, but it already has $39 billion in debt. Verizon might be smarting from the rancorous bidding war with Qwest over MCI —Verizon won the prize, but not before tacking on an extra $2 billion to the purchase price, Howard noted.

“They could get over that, but I think the debt is the biggest piece,” Howard said of Verizon. “That’s a lot of debt.”

A perhaps more viable acquisition target for Verizon would be the slew of independent telcos such as Alltel Corp., a Little Rock, Ark.-based incumbent local-exchange carrier and wireless service provider that claims nearly 3 million wireline customers in 15 states.

According to FCC statistics, there are some 1,300 incumbent local exchange carriers, the bulk of which are independent telephone operators in rural markets.

LEVEL 3 OPTION?

Qwest could become an acquirer, Howard noted. If so, it might not look far from home: Broomfield, Colo.-based Level 3’s telecom backbone could be a stronger strategic add than gobbling up any smaller independent telcos in adjacent territories.

“Carriers get efficiencies from carrying traffic on their own network out of region, so Level 3 would be the better pick on the face of it,” Howard said.

Cable companies like Comcast, which has already struck deals with Level 3 to provide dark-fiber capacity to create its own nationwide backbone, could also have its eyes on Level 3 to secure that capacity, as a defensive measure, if nothing else, the analyst added.

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