Analysts question Level 3’s intentions

Level 3’s plan to purchase Genuity should concern Genuity’s enterprise customers, according to industry analysts.

Level 3 Communication’s recently announced plan to purchase Genuity should concern Genuity’s enterprise customers, according to industry analysts.

“My advice to Genuity customers would be . . . see what else is out there,” says Steve Harris, an IDC analyst. “I don’t think this is a business Level 3 is going to support.”

Level 3 has a policy of not competing with its wholesale carrier customers, Harris says, and entering the enterprise market would result in Level 3 competing against other carriers.

Dana Tardelli, an analyst with Aberdeen Group, agrees that it’s unlikely Level 3 would want to keep Genuity’s enterprise business. But he doesn’t think there’s any reason for customers to panic.

“They wouldn’t strand any customers,” he says. “I’m sure they’d support them until they were sold to other providers.”

In a conference call after the deal was announced, Level 3 CEO James Crowe said Level 3 would keep Genuity’s enterprise customers.

That might be true in the short term, Harris says, but he questions whether Level 3 plans to keep the enterprise business for long. “I doubt very much that they’re interested in the enterprise business, even if they’re saying they are right now,” he says.

Level 3 revealed plans to buy Genuity, which has a debt load of almost $4 billion, in late November. The price could be as high as $242 million or could drop to $177 million or less depending on how much of Genuity’s business Level 3 acquires.

Earlier this year Level 3 received a $500 million cash infusion from billionaire Warren Buffet and other investors, and it has been shopping for deals.

“We’ve said…we’d be interested in companies that provide services we already offer in geographic areas where we already operate,” said Crowe, adding that Genuity meets both requirements.

As part of the deal, Genuity filed for Chapter 11 bankruptcy protection in late November. Genuity investors would receive Level 3’s payment and some additional cash Genuity is still carrying if the court approves the reorganization plan.

Genuity plans to continue operating normally under Chapter 11.

Genuity has been considering alternatives since Verizon declined to exercise an option to reacquire Genuity last summer.

As part of the GTE/Bell Atlantic merger that formed Verizon in 2000, regulators required the new company to spin off its long-distance data assets, resulting in the creation of Genuity.

Level 3’s main business is selling wholesale bandwidth to other carriers and service providers. Most of Genuity’s business also comes from wholesaling bandwidth to other providers, including Verizon.Those contracts are likely why Level 3 found Genuity so attractive, IDC’s Harris says.