Level 3 Is 'Committed to Europe'
Brady Rafuse, who has been European group VP and president since 2001, says "Europe is very much part of Level 3's global strategy. Many of our customers operate on both sides of the Atlantic. We are committed to our European business. It's a good, solid business."
But he also says that the European market is "oversupplied, and there needs to be consolidation for the long-term health of the European, and global, telecom market. It's a process that needs to take place and we'd like to play a part in that process."
And it's a process that's already begun in Europe and internationally, including in North America where Level 3 has been cited as a potential takeover target (see BT Goes Global – Again!, Level 3 Weighs Its Options, SBC to Buy AT&T for $16B, and Qwest Ups MCI Bid to $8.45B).
Rafuse says he's sure that all the pan-European operators would agree that consolidation is necessary, but he declined to comment on whether Level 3 is engaged in talks, or has had talks, with any other players about any merger and acquisition activity.
There's certainly no shortage of operators offering cross-border voice and data services in Europe. Other than Level 3, the main players include AT&T Global Network Services, BT Group plc's (NYSE: BT; London: BTA) Global Services division, Colt Telecom Group plc (Nasdaq: COLT; London: CTM.L), Equant (NYSE: ENT; Paris: EQU), Global Crossing Holdings Ltd. (Nasdaq: GLBC), Interoute Telecommunications Ltd., MCI Inc. (Nasdaq: MCIP), and T-Systems Inc.
Level 3's European business has been under scrutiny of late, following the operator's latest round of redundancies, when the carrier cut about 10 percent of its 5,000 global workforce, and its withdrawal from part of the wholesale VOIP market (see Level 3 Cuts Hundreds of Jobs and Level 3 Provides VOIP Lesson). There has also been industry talk that Level 3 has been trying to sell its European VOIP platform.
Rafuse says "some people were made redundant" (about 50 in Europe according to reports), leaving the European business with about 280 staff, of which more than 50 are in sales and marketing. The hosted wholesale VOIP service, called 3(Tone), was never actually launched in Europe, he says, though it was announced last November (see Level 3 Launches Euro VOIP Program).
"We have some equipment and software that was associated with the 3(Tone) service and we're wondering what to do with that. We'll do what's right for the business."
Rafuse wouldn't say whether Level 3 had been trying to sell the VOIP platform to any interested parties in Europe.
He is quick to point out, though, that Level 3 still does offer VOIP services, in the form of its IP voice termination service, and has Skype Technologies SA as a customer (see Skype Names Carrier Partners). But that's "a very small business," admits Rafuse.
The more significant money makers for Level 3 in Europe are its IP services –- "we're in the top three in Europe" –- its transport business, which Rafuse describes as "strong but not stellar," and the infrastructure services, including collocation and fiber leasing, which he says is growing. Overall, the carrier has nearly 3,600 miles of fiber routes and is active in 22 major business markets in Northern and Western Europe, and Rafuse says Level 3 has a positive EBITDA (earnings before interest, tax, depreciation, and amortization).
After those costs, though, the European business is showing a loss. In 2004, European revenues were $771 million, of which $139 million came from communications services ($83 million from transport and infrastructure, and $56 million from IP and data services). The rest came from Level 3's information services business, which involves the sale of business software to enterprises.
Operating income before depreciation and amortization (OIBDA) in Europe was $14 million in 2004, while depreciation and amortization totaled $95 million, according to the carrier's 2004 annual report. This gives the European operation an operating loss of $81 million.
Total revenues are on the rise, however. In 2003, Level 3's European sales totaled $703 million, of which $138 million came from communications services.
— Ray Le Maistre, International News Editor, Light Reading