Jim Crowe: We’re a company that’s going to be generating a
significant amount of cash
It took a surprising seven years for Level 3 to achieve its merger with Global Crossing, but at the beginning of October CEO Jim Crowe finally achieved his ambition. Level 3 completed its acquisition in a tax-free, stock-for-stock exchange that valued Global Crossing at $3 billion, six months after the merger was announced.
It’s “a hand-in-glove fit”, says Crowe, who has run Level 3 and its predecessors since 1997. And the expanded Level 3 has the support of its customers for the deal, he adds.
“We did a fair amount of research with third parties who talked to quite a large number of our customers, our employees — from both companies,” says Crowe. “And this I’m sure may be somewhat obvious, but customers — big, small, global — all say the same thing: ‘We want someone with the size, financial stability, scope, reach and set of services that we get from the PTTs, AT&Ts, Verizon, but is easy to do business with and cares about our business.’ That’s what we want to be.”
The deal was welcomed in the financial markets too, he adds: “We’re a company that’s going to be generating a significant amount of cash. The pricing of our bonds improved remarkably.”
Now, Level 3 has “the financial capability, the size, the scope, the set of services and the global reach to give folks something they could only get from PTTs or some combination of PTTs, but with a degree of customer service that we’ve shown them in the past. That’s our goal.”
The two companies have been working on integration since the deal was announced in April. But Level 3 and Global Crossing were talking for long, long before that. “We’ve been working together now, talking about this acquisition and talking in detail with teams on and off for seven years, and intensely for a couple of years,” says Crowe.
He notes: “Buddy Miller, who’s our vice chairman and among other things runs mergers and acquisitions, checked his files and said we made our first offer for Global Crossing back in 2004, so that’s a long gestation period.”
That was only a year or so after control of Global Crossing — then in Chapter 11 bankruptcy protection — was bought by Singapore Technologies Telemedia, an investment arm of the government of Singapore. So what happened in April that made ST Telemedia decide the time was right to accept a Level 3 offer?
“Well, I can only speak for our point of view,” says Crowe. “We’re the buyer, so we obviously were interested in moving forward.” Both companies were performing well. “We looked at the combination. That maybe made us willing to pay a little more, and them willing to accept a little less because they were accepting stock.”
As it was a stock deal, ST Telemedia is now the biggest shareholder in the new Level 3, with 25% of the company. Crowe is delighted with that arrangement: “If we could, we would have our company owned entirely by long-term investors who understand our business, are supportive of it, and believe in the industry over time.” ST Telemedia “is just such an owner”, he adds.
Level 3 has two other significant investors: Southeastern Asset Management with about 20% and Fairfax Financial with 10%. “We are very pleased to have that kind of stable, long-term ownership. It allows us to focus on the long term, and long-term shareholder value creation.” There are about six shareholders in all “who have been with us a long time who between them own approaching two-thirds of our company”.
ST Telemedia has three representatives on Level 3’s board, including two Singaporeans. “Our next board meeting is going to be in Singapore,” he notes. ST Telemedia is “a very sophisticated group [that is] known as savvy investors. They invest in communications and technology around the world. So we certainly seek their advice and counsel.”
Capital investment budget
One of the questions the board will no doubt be deciding is where Level 3’s capital investment will be in 2012, when the company plans to spend $600-$700 million.
Where? He’s cautious. “We haven’t made those decisions yet. We’re right in the middle of it.”
Level 3 is weighing up investment in the US and the UK “where we already have dense network because where you have the veins and arteries, investing in the capillaries gets you huge returns”, compared with “the growth rates, the tremendous opportunity in LatAm, the tremendous opportunity moving east in Europe. So we’ve got a lot of factors to weigh up, and we’re right in the middle of it.”
Now that Level 3 and Global Crossing are together, how has that changed the expanded operator’s offer? “It all starts with the customer, doesn’t it? I’ve always felt our industry hasn’t kept up with the globalisation of our customer base,” he says.
He puts this down to “the historical nature and government ownership or near ownership or heavy regulation of what used to be the PTTs, the dominant flag-carrying phone company in each country”. Companies in the industry tend to be limited to national boundaries. In the US, “we make it pretty painful for people who want to buy communications assets in this country”, he adds.
But there are customers, large and small, that need international services. “And where do they buy them? From consortia, from systems integrators, who then turn around and buy from the local PTTs,” he says.
“Our goal, our opportunity almost uniquely is to use what we’ve put together to begin developing the first local-national-global communications company. We’ve got a ways to go, but we’ve got a good start. And the key here is always focus on the customer and the customers’ needs.”
That implies that Level 3 may be looking for further deals. Is he talking to any potential acquisitions at the moment? “I wouldn’t tell you that if we were,” says Crowe. But he gives a pretty thorough run-down of where the opportunities are.
“In Latin America, we’ve got about a $2 billion network,” he says. “It’s local and it’s in nine countries. It crosses the Andes. And all kinds of opportunities to continue to invest in one of the fastest growing parts of the world. Half the population is in Brazil, and all sorts of opportunities there.”
Global Crossing had an extensive network in the UK, thanks to its 1999 dotcom-era purchase — before its excursion into Chapter 11—of Racal Telecom, a company that had just made an operating profit of only £2.6 million on annual sales of £199 million. Global Crossing, founded only two years before, paid a remarkable £1 billion, then worth $1.6 billion.
Racal — the founder of Vodafone, from which it had already demerged — had earlier bought the British railway system’s telecoms infrastructure, giving it access to the centre of every city and town. More than a decade later there are “opportunities to extend that network directly into the buildings where it is already close”, says Crowe. “There are thousands of locations our network passes by, but we’re not in those buildings. That’s an opportunity.”
Eastern European opportunity
The European continent “is another place where we really get excited because while it’s not that much fun competing with the PTTs in their service territory, in their countries, we think there are all sorts of opportunity to go across border”, he adds. “And Eastern Europe is the wild West, in effect. Huge opportunity. There are risks, of course, but huge opportunity given the growth rates and broadband uptake. So we don’t lack places to invest.”
Will he be doing it by construction of new networks or by acquisition? “Where we see an opportunity to acquire that creates more value than building, that’s what we’ll be interested in doing,” says Crowe.
Level 3 is used to integrating acquisitions. In the US, under Crowe’s management, it has successfully taken over three long-distance companies before Global Crossing: Genuity, WilTel and Broadwing.
But integrating long-distance companies is relatively straightforward. “The networks are already interconnected, and you can literally sit at terminals and groom networks. You can move traffic off of AT&T locally and onto Level 3’s local connections, or Verizon’s, or CenturyLink’s. That’s done all day long as a matter of course.”
Integrating companies with local networks is a bit more of a challenge. “When you seek to integrate two local companies that actually own fibre in New York and LA, when you provision service there, you actually have to roll trucks,” he says. “You have to put equipment in buildings. It’s physical work, and the workflow there and the processes and systems and inventories are very complicated.”
Level 3 has had “some process problems that caused us to disappoint our customers and ourselves” in the past, when it took over local operations. “That’s all behind us. We were pretty open about it, but we did learn a lot.”
At the merger, Global Crossing did not own local facilities in the US. “They own long-haul facilities, generally. I’m speaking in absolutes. The world isn’t black and white, but in general in the US they don’t own local facilities. So that’s pretty straightforward,” he says.
“In LatAm, we don’t own any facilities. That’s straightforward. We don’t have people down there.” In Europe “Global is relatively strong, much stronger in the UK where we [the old Level 3] have a minimum of facilities.” As a result, “this is a much more comfortable integration than the ones we did back in 2005”.
Today, the combined operation has “about $37 billion invested in our global network”, he says. “That’s the original investment in the two companies and the acquired companies.”
Owning network is important. “For the services that we provide and the kind of focus we have, we need to own and control our network. It’s hard to develop, for instance, a better service if you’re reselling somebody else. And that’s been fundamental to Level 3 from the start,” he says. “You cannot create new services, offer new products, have a superior customer service if you resell someone else’s network.”
Telecommunications is vital to companies’ existence. “If you’re cut off from your communications facilities, you rapidly go out of business,” he warns. “You need diversity.” But two suppliers may use the same local facilities and same fibres. They may “both use BT or they both use AT&T’s local facilities or Verizon’s or Deutsche Telekom’s. That’s not providing the kind of service we believe our customers want.”
The lesson he has learned “in 25 years of this business is if you resell another company, sooner or later you’re going to end up selling out or bump up against the wall”, he says. “You can only go so far reselling someone else’s capacity.”
So that means he’s actively looking? “There’s plenty of gaps and plenty of opportunities to continue to invest and grow, but if you want to know where we plan to focus, it’ll be where we can own network. So that’s UK, Europe, that’s LatAm, US — and Africa is pretty interesting,” he adds. “You can own network in Africa. You can own undersea. You can’t own largely in Asia Pacific on the land.”
That implies Level 3 plans to spend heavily in the next few years on new network — built or bought. With what? “We expect, plan, and want to generate hundreds of millions of dollars of excess cash a year,” says Crowe. “You can expect us to put it in those places where we can expand our network right directly to customers, to their locations.”
Maybe even in the US, where the company already has “an enormous footprint, comparable on a national basis to AT&T and Verizon”, he says. “They have more density in their service territories, but not nationally. It’s a very big network.”
There has not been a lot of landline construction in the US since the dotcom bubble burst in 2002, he notes. There is “a lot of focus on wireless by the larger companies, that’s where most of their capital is going, but not a lot of landline”.
Yet over that time “the locations that justify fibre have moved out of just the central business districts of cities. There are neighbourhoods that use as much bandwidth as all of New York City did only a relatively short time ago.”
Wireless broadband will drive a lot of this demand in the future. “Wireless is still a relatively small contributor to overall traffic, but I don’t talk to anyone, and we’re in this category, who doesn’t believe that over time, given its growth rate, you’re going to need fibre to every tower. So there is an enormous opportunity to continue to build without end here in the US.”
And the possibilities continue to grow. In an interview with Global Telecoms Business in mid-2003 he lamented that it was still cheaper to ship video on DVD than by fibre. He said at the time: “I’ve always felt it’s one of the great indictments of our industry that it’s still cheaper to distribute information on truck networks and airplane networks and ship networks than it is on communications networks.”
That was the year the economics changed. Today he says: “In 2003, it became cheaper to move a standard definition signal, video, over an IP optical network versus other distribution mechanisms. In 2006, it became more economical to move an HD signal.”
That’s led to the development of content distribution networks. “We’re the only big carrier, really, that’s deployed at scale. We’ve said from the beginning, this is a carrier technology.”
CDNs started out with resellers, but “if you resell other people’s capacity, sooner or later you’re going to run up against the wall technically or economically. CDN is and will be a necessary carrier technology. We’re a leader, and we’re taking share. We’re a technical leader and we’re a leader in the marketplace.” GTB
Further reading from Global Telecoms Business:
Level 3 completes Global Crossing buy 04 Oct 2011
Level 3 to acquire Global Crossing 11 Apr 2011
Transformation, transition, consolidation and acquisition 01 Jun 2007
Surviving on the level 01 Jul 2003
James Crowe on the level 01 Jul 2001
First mover advantage in going into Chapter 11 01 Jul 2002