Internet Hosters Lose Another Potential Buyer

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Includes: GLBC, LVLT
by: 451 Research: Inorganic Growth

By Ben Kolada

In the latest billion-dollar-plus telco transaction, Level 3 Communications (NASDAQ:LVLT) has announced that it is acquiring Global Crossing (NASDAQ:GLBC) in an all-stock deal worth $1.9bn. (The actual price of the acquisition – the largest we’ve recorded for Level 3 – is closer to $3bn when Global Crossing’s debt is included.) And while the deal impacts the telecom industry by bringing together two well-known fiber operators, in a way it more significantly impacts the hosting and colocation markets by removing yet another potential telco buyer. (We’ll have a full report on Level 3 buying Global Crossing in tonight’s Daily 451.)

Earlier rumors in the hosting and colocation industries had Level 3 as a potential acquirer, perhaps picking up CDN vendor Limelight Networks (NASDAQ:LLNW) or hosting company Internap Network Services (NASDAQ:INAP). These rumors were made more convincing by the growing trend of telcos buying into hosting and colocation. But in their conference call discussing the transaction, executives at Level 3 and Global Crossing put those rumors to rest, saying they don’t expect to announce another acquisition anytime soon. Further distancing Level 3 from the hosting M&A game is the fact that the company doesn’t appear to be too interested in hosting or datacenter services at all, since it chose a target that generates only 5% of its total revenue from these segments.

We previously noted that CenturyLink (NYSE:CTL) is likely out of the market as well, following its purchase of Qwest Communications (Q) for an enterprise value of $22.4bn, which saddled the company with a mountain of debt (the deal closed April 1). 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 debt load 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 activity, thereby forcing the company to focus on organic growth. With CenturyLink/Qwest and now Level 3 focused on integration, we expect that acquisition speculation following the next telco-hosting deal will be somewhat tempered.

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