CenturyLink/Level 3 Deal Faces New Objections, But Still Expected to Get Approval
Analysts remain bullish about the prospects of CenturyLink's planned buy of Level 3 (see 1610280052) despite new criticisms filed at the FCC, this time by Frontier Communications and Public Knowledge. "The odds of the deal closing have to be judged as being quite high," and the limited opposition "only reinforces the point," Nick Del Deo of MoffettNathanson told us Thursday. Chris Antlitz, Technology Business Research analyst, agreed: "There will be some competitive considerations and investment considerations that will need to be reviewed and negotiated, but I still think the merger will ultimately go through with minimal concessions." The FCC is considering a CenturyLink/Level 3 application to transfer licenses; the deal is also being reviewed by DOJ on antitrust grounds, and by state regulators.
Frontier said the combination would be anti-competitive without "sufficient conditions." The applicants could use "their increased scale to avoid paying agreed upon amounts, either through tariffed rates or commercial agreements, to smaller competitors," said Frontier reply comments to the FCC in docket 16-403. "If left unchecked, the Applicants will leverage their stronger market position as long-haul and core network providers to potentially squeeze competitors and unnecessarily drive up costs for rural broadband providers and thereby adversely affect rural broadband deployment.”
The applicants haven't shown that their deal would "enhance, rather than eliminate competitive choices" for business data service (BDS) customers, including "small businesses, startups, community anchor institutions, and state and local governments," said a PK reply. CenturyLink/Level 3 (here) and two tribal entities (here and here) also filed replies, with the prospective partners responding to previous criticism from Incompas and another tribal group in initial comments in January (see 1701240037). Cowen analyst Paul Gallant said last month the lack of greater resistance was a good sign for the transaction being approved (see 1701250074).
The additional concerns expressed in reply comments can be addressed, Gallant said Thursday. "Those filings highlight that BDS concentration is the main area of risk. But to varying degrees, the three key opponents all imply they can live with conditions. That’s pretty encouraging for the deal.”
Del Deo cited both local and long-haul concerns but agreed they aren't deal breakers. "The potential hang-ups relate to a reduction in competitive intensity in some of CenturyLink’s incumbent markets (Phoenix, Denver, Minneapolis, Seattle, etc.) and the concentration of so much of the country’s next generation long-haul fiber assets under one roof (many other operators and competitors rely on IRUs [indefeasible rights of use] from Level 3 for portions of their long-haul backbones: Cogent, Comcast, Zayo, XO, etc.)," he emailed. "If regulators are concerned, they could easily put remedies in place, and it’s hard to imagine CenturyLink wouldn’t agree to them." For instance, he said, "Regarding building access in-region, they could require the new CenturyLink sells wholesale access to competitors at reasonable terms in some specified subset of buildings or in specific markets.”
CenturyLink said it respected the FCC comment process and remained confident about the deal's merits. "We believe that this transaction meets the public interest requirements and will strengthen the nation’s IP infrastructure and provide competitive alternatives for the enterprise business segment,” it emailed Thursday.
Frontier said Level 3 in particular wasn't making timely payments for Frontier services. "Level 3’s conduct goes far beyond a reasonable level of disagreement over the appropriate application of certain charges when parties are paying tens of millions of dollars in services," Frontier said. "Every time Level 3 disputes a charge, Frontier must allocate resources to review it. If there is merit to the dispute, Frontier promptly issues a credit. If there is no merit, Frontier will deny the dispute with the expectation that payment will follow.”
“Level 3's practice is to always drag its feet in responding, or disagree with the denial, keeping money owed to Frontier in its accounts and earning interest on it," Frontier added. "It appears that Level 3 is seeking to so overwhelm the seller of services that some of the disputes will fall outside the collection window, or worse, it can force settlement of these disputes for a fraction of the amount due." Level 3 recently improved its behavior, Frontier said, but things could get worse if the deal is approved, giving the companies increased scale. Frontier urged the FCC to require Level 3 and CenturyLink to get current on all balances over 90 days outstanding, resolve all disputes within 180 days, and establish a commission contact for addressing the disputes. Level 3 declined to comment Thursday.