FCC End Game Expected on CenturyLink-Level 3 After DOJ, Team Telecom Actions
The FCC appears likely to act soon on CenturyLink's planned buy of Level 3 now that other agencies signaled willingness to clear the deal subject to conditions, a commission official and an analyst said Tuesday. Another analyst doubted major FCC resistance and called DOJ-required divestitures light. Justice confirmed it would require CenturyLink and Level 3 to divest or effectively divest certain assets under a proposed settlement. Monday, CenturyLink reported the antitrust action and repeated its target of closing the deal this month. DOJ, DOD and the Department of Homeland Security ("Team Telecom") said they wouldn't object to the deal on national security and law enforcement grounds provided the FCC conditions it on CenturyLink compliance with commitments (see 1710020050).
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"All this stuff is pretty well coordinated, so I would assume it comes pretty quickly," said an FCC official, referring to a draft order. The commission's informal 180-day "shot clock" remains paused on Day 170. An FCC spokesman didn't comment. California Public Utilities Commissioners plan to vote Oct. 12 on a proposed decision approving the deal (see 1709080032), said an agenda released Monday.
"I think this signals that FCC approval is coming very soon," said Cowen analyst Paul Gallant. "The agencies coordinate closely, so I expect both agencies' concerns are largely addressed by the DOJ divestitures." MoffettNathanson analyst Nick Del Deo said he never thought the deal "would face much pushback from regulators, and would be surprised if anything came out of the FCC that was significant." Justice action "was a quick review and decision by the new assistant attorney general, allowing the work of the staff to go forward," said Paul Glenchur, Hedgeye Potomac Research senior telecom and cable analyst, referring to Makan Delrahim, recently confirmed as antitrust chief (see 1709270058). "They’ve obviously done a lot of work on the AT&T/Time Warner transaction as well and presumably the now-confirmed antitrust chief is getting up to speed quickly on the staff’s recommendations."
The department said it filed a civil antitrust lawsuit Monday in U.S. District Court for the District of Columbia, while proposing a settlement, subject to court review, to resolve competitive concerns. The complaint said CenturyLink and Level 3 own two of the three most extensive metro-area fiber networks in Albuquerque, New Mexico; Boise, Idaho; and Tucson, Arizona; where they are each other's "closest competitor" for many enterprise and wholesale customers. In many buildings, the companies are the only providers, or two of the only three providers, with a fiber connection, it said. They also "own substantial amounts of dark (unused) fiber connecting pairs of cities," which DOJ called a "crucial input for large, sophisticated customers."
The companies would be required to divest Level 3 assets "used exclusively or primarily to support" its provision of telecom services to customer locations in the Albuquerque, Boise and Tuscon metropolitan statistical areas (MSAs), said a DOJ proposed final judgment. It said definition of MSA divestiture assets "shall be construed as broadly as necessary." To address the intercity concerns, it would require the companies to make available, through indefeasible rights of use, dark fiber on 30 routes for at least 25 years, with the de facto acquirer able to extend the term twice by five years.
CenturyLink expects court approval as early as this week of the "agreed resolution" with DOJ, said Senior Vice President John Jones, saying the company is focused on meeting its targeted deal closing of mid-to-late October.
"We never expected any regulatory conditions ... to be that meaningful, and last night’s consent decree fits that view," Del Deo said in an investor note. He said the sale of Level 3's metro assets in the three markets "is irrelevant" to CenturyLink and Level 3 equity investors: "the MSAs are about 0.8% of the U.S. population, and we suspect their share of Level 3's business is even smaller still," and CenturyLink could keep Level 3's customers and the revenue they provide if they choose its service. "The dark fiber sale is more interesting, but in all likelihood not that consequential, either," he said, noting a single buyer must buy the whole "patchwork" of routes. "Zayo will surely be interested, and has to be judged the leading candidate," Del Deo wrote. Zayo didn't comment.
Getting a California OK next week isn’t a sure thing, said Tellus Venture Associates President Stephen Blum, who, as an advocate for local governments, resisted the acquisition. The proposed decision could be moved to the regular agenda, where discussion would be required, and there’s time for a CPUC commissioner to float an alternative decision before the Oct. 12 meeting, he said. If a commissioner offers an alternative, the agency may postpone the vote at least until the next meeting, Blum said. The California Emerging Technology Fund and VoIP provider Telnyx earlier raised concerns at the CPUC about approving the deal and didn’t comment Tuesday.