CenturyLink is keeping a close eye on takeover opportunities in Europe as it anticipates additional merger activity in the region's infrastructure markets.
The US-headquartered operator, which provides network services to businesses and public sector institutions, is in a much stronger position outside North America following its takeover of Level 3 Communications Inc. (NYSE: LVLT) last year. (See CenturyLink CTO: Now the Fun Starts.)
But Richard Warley, the regional president of CenturyLink Inc. (NYSE: CTL) for Europe, the Middle East and Africa, thinks consolidation has yet to run its course in the European region. He indicates that CenturyLink could play its part in the merger mania, even if its current focus is on organic growth.
"We will absolutely continue to look at opportunities as and when they come along, but you can never tell when you will get the right asset at the right price," he tells Light Reading. "Growing organically is our core strategy, as well as looking after existing customers."
A former investment banker, Warley reckons consolidation in CenturyLink's US markets has gone as far as it can without bumping into antitrust issues. But he says Europe remains a long way from this state of affairs, with about 70 "alternative" carriers across the region. "That is probably too many," he says. "We've seen private equity and strategic activity and that will continue."
Warley, who talked to Light Reading on the sidelines of a London conference about telecom investment, points out that valuations in the sector are at historically high levels as infrastructure investors shift their focus to connectivity and digital assets.
"There is a subset of private equity that has historically looked at roads and bridges and now looks at fiber as a similar asset class, underpinned by secular changes in the digital world," he says.
This private equity interest is significant because infrastructure investment funds have traditionally been willing to accept a lower rate of return in exchange for stable revenue streams. "Lower rates of return translate into higher valuations," says Warley.
Burgeoning interest in 5G is one of the big "macro themes" driving infrastructure investment, he says. While CenturyLink is unlikely to provide 5G mobile services directly, its fiber networks are crucially needed for the "backhaul" connections that run between basestations and core network systems. "One way or another there needs to be a lot of fiber and that is a growth opportunity for us," says Warley. (See Europe's Backhaul Black Hole Looms Above 5G.)
While CenturyLink is not actively pursuing takeovers right now, it is effectively an agglomeration of network businesses including Qwest, Embarq and TW Telecom following its recent acquisition of Level 3. That puts it in a strong position when it comes to any future takeover activity, according to Warley. "Both companies [CenturyLink and Level 3] have that heritage of acquiring assets," he says.
The integration of the Level 3 business, which CenturyLink finally acquired for a cash fee of $34 billion in November last year, is now running ahead of schedule, says Warley. (See CenturyLink's $34B Deal for Level 3 to Close This Week.)
The efficiency target unveiled when the takeover was first announced was to realize a total of $975 million in annual cost savings, including about $850 million in operating costs and $125 million in capital expenditure.
"Some of that is from improved buying synergies and role overlap and of that $975 million a little over $210 million had already been identified on an annualized basis [in the company's first quarter]," says Warley.
On a pro forma basis, CenturyLink reported a 1.7% dip in revenues for the first quarter, to about $5.95 billion, compared with the year-earlier quarter. Adjusted earnings (before interest, tax, depreciation and amortization) were essentially unchanged, at about $2.1 billion.
Unsurprisingly, some of those cost-savings will come from job cuts. In May, CenturyLink said the merger with Level 3 and investment in automation would claim 2% of jobs at the company. Based on employee numbers disclosed in regulatory filings, that equals about 1,000 roles. (See Automation, M&A Lead to 1,000+ Job Losses at CenturyLink.)
The savings goal suggests CenturyLink is eyeing much bigger cuts in the future, although Warley downplays the impact of automation and says the operator's focus is on improving customer service and retraining staff to use new technologies. (See CenturyLink's Feger: Automation Sets You Free and CenturyLink CEO: Automation Key to Improved Customer Experience.)
Asked about the impact of artificial intelligence on the broader industry, Warley agrees that some jobs will disappear but does not anticipate the same upheaval as gloomier observers. (See Efficiency Drive by Major Telcos Has Claimed 74K Jobs Since 2015.)
"There is no reason to think about this as a cliff that we are going to fall off," he says. "If you want to get to the point where 15% of employees leave and go and do something else, there is no reason for precipitous changes. You can get to that point in a measured way without doing anything that interferes with people's choices."
— Iain Morris, International Editor, Light Reading