By Ben Kolada
Almost exactly one year after they announced their intention to merge, CenturyLink (NYSE:CTL) and Qwest Communications (NYSE:Q) are set to close the largest US wireline consolidation play in the past half decade. But while the deal will more than double CenturyLink’s revenue, the debt assumed could prevent it from making another significant acquisition anytime soon. And that’s a shame, since the combined company’s datacenter business could use a boost.
Even in retrospect, the Qwest purchase is still a smart deal, since CenturyLink needs Qwest to expand its own meager business services division – especially since the telecom industry’s focus between consumer and businesses is increasingly leaning toward the latter. But while the move grows CenturyLink’s revenue, in the near term the assumption of Qwest’s debt will actually prevent the company from moving into the datacenter and hosting industry, which is showing more long-term potential than wireline services.
Neither Qwest nor CenturyLink are providing aggregate financial projections for 2011, but numbers from 2010 show the combined company will be weighed down by a hefty amount of debt. Last year, CenturyLink and Qwest held an aggregate $19bn in debt; that’s nearly equal to the revenue the two companies generated over the same period. Further, that mountain of debt is more than five times the combined company’s free cash flow. Debt repayment obligations will likely put a halt to CenturyLink’s steady M&A history, thereby forcing the company to focus on organic growth.
And this comes at a time when telcos are increasingly seeking growth by buying into the cloud infrastructure industry. With Qwest’s debt, CenturyLink may be the last to the table to acquire a large hosting provider, even though the company certainly needs one. Qwest’s datacenter footprint is already fairly small when compared to the other Regional Bell Operating Companies. In its last-ever annual report, the company cited 17 hosting centers in operation – that’s the same amount as many of the medium-sized private providers. Without an inorganic boost, the company could lose out on cloud infrastructure market share. Consider this: Qwest doesn’t break out datacenter revenue, but the business division’s sub-segment that includes this service only grew 8% in 2010. For comparison, in its 2011 Global Managed Hosting Market Overview, our Tier1 Research subsidiary predicted that the managed hosting sector’s global revenue will grow 19.8% this year.