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Level 3 Rollup Strategy Making Progress

Kelly Teal

March 1, 2006

4 Min Read
Level 3 Rollup Strategy Making Progress

THE WHOLESALE MARKET IS in flux, illustrated by yet another strategic acquisition that narrows the field of carriers carriers. Level 3 Communications Inc. announced in late January it will buy up yet another wholesaler, Progress Telecom LLC, based in St. Petersburg, Fla.

Level 3 will pay $137 million in cash and stock for Progress Telecom, which is jointly owned by Progress Energy Inc. and Odyssey Telecorp Inc. Progress Telecom serves approximately 200 customers, including Level 3 as well as many wireless and international carriers.

The deal is expected to close early in the second quarter, pending standard state and federal regulatory approvals.

This looks like a solid move for both players with clearly identifiable synergies, says Dr. Judy Reed Smith, CEO of research firm ATLANTIC-ACM. Level 3 gains a wellmanaged, respected regional player along the East Coast that will continue to operate largely autonomously, with the same, proven management team at the helm.

As for Progress Telecom, Reed Smith says the regional carrier gains access to Level 3s resources, including a modern network and, after integration,WilTels network and operations.

Indeed, Level 3 in December 2005 closed on its acquisition of WilTel Communications Group LLC. That purchase gave the underlying provider access to 50 new markets and 3,000 new route miles. Progress Telecom adds 9,000 miles, 29 metro networks, connections to international cable landings in southern Florida and 31 mobile switching centers in the Southeast.

Kevin OHara, president and COO of Level 3, says the transaction represents a unique opportunity to expand Level 3s footprint in the southeastern region of the United States, where we have seen strong demand for our services. More importantly, we serve a number of the same large, key customers, particularly certain wireless and international customers. We believe that the completion of this transaction will enable us to expand our relationship with these customers and offer them a broader set of services in more markets outside the southeast.

Progress Telecoms 30-plus wireless operator base is a significant upside to the deal, says John E. Romagnoli, senior analyst, Wholesale Communications Strategies for Yankee Group Research Inc. He notes mobile operators are a focus for Level 3 and this acquisition will reduce access costs and provide access through southern Florida to Latin America, which he says is a pretty hot market for wireless providers.

OHara says the company will realize significant cost synergies by integrating certain operational and corporate activities when it acquires Progress Telecom. Level 3 expects to begin uniting its networks with Progress Telecoms in 2007, once it has finished consolidation with WilTels networks.

Level 3 will not acquire certain assets that are part of Progress Telecoms wireless tower attachment business, or Progress Telecoms interests in affiliates that provide distributed antennae systems and tower backhaul services to wireless providers. Level 3 says it plans to have commercial services agreements in place to provide transport services and operations support to these former Progress Telecom affiliates. The company adds it will work with those affiliates to develop complementary service offerings for wireless carriers.

Progress Telecom and Progress Energy executives say they welcome the buyout. We believe our customers will benefit greatly from expanded access to Level 3s international network and its broad suite of transport, IP and VoIP service offerings, says Ronald J. Mudry, president and CEO of Progress Telecom.

Don Davis, executive vice president of Diversified Operations at Progress Energy, says his company will continue to use Progress Telecom for transport and network management services. Progress Energy is Progress Telecoms largest customer.

With Progress Energy remaining Progress Telecoms largest customer and because Progress is a relatively small player at $70 million a year, analyst Romagnoli doesnt see the deal having a huge impact on the wholesale market.

While that may be true, it is part of a larger consolidation trend that analysts say finally may be impacting pricing. Following years of destructive competition and pricing based on sunk costs, consolidation has begun to have an impact, say analysts at TeleGeography, noting signs of price stability in the wholesale market. Strong demand for large capacity increments, combined with a smaller field of competitors, has handed some pricing power back to the carriers. If this trend continues, it may mark the first time in a decade that prices have held steady for a year. Since there are about 30 competitors still left in the U.S. long-haul market, the analysts add, prices could stay on the downward slide for a while longer.


ATLANTIC -ACM www.atlantic-ACM.com
Level 3 Communications Inc. www.level3.com
Odyssey Telecorp Inc. www.odysseytel.com
Progress Energy Inc. www.progress-energy.com
Progress Telecom LLC www.progresstelecom.com
TeleGeography www.telegeography.com
WilTel Communications Group LLC www.wiltel.com
Yankee Group Research Inc. www.yankeegroup.com

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About the Author(s)

Kelly Teal

Channel Futures

Kelly Teal has more than 20 years’ experience as a journalist, editor and analyst, with longtime expertise in the indirect channel. She worked on the Channel Partners magazine staff for 11 years. Kelly now is principal of Kreativ Energy LLC. Follow her on LinkedIn at /kellyteal/.

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