LEVEL 3 EYES C&W's U.S. ASSETS

Level 3 Communications is in negotiations to buy the American assets of London-based Cable & Wireless, according to a source close to the deal. A major carrier recently withdrew its interest in the nationwide IP network, the source said, leaving Level 3 and at least one other potential buyer in the running.

“It looks like the most likely [buyer] is Level 3,” the source said. A Level 3 spokesman said the company does not comment on rumors.

C&W's new CEO, Francesco Caio, told investors in June that exiting the U.S. market was among the company's three top objectives, all meant to streamline the recovering carrier's business. In the past year, C&W shed nearly half of its U.S. data centers and more than half its U.S. employees. It also sold its U.S. e-messaging business in January and will halt its ATM and frame relay business here this month. But revealing any more details about C&W's plans for its American assets would be “commercially unhelpful at this stage,” Caio said during the company's earnings call in mid-November.

C&W's otherwise straight-talking chairman, Richard Lapthorne, added only a vague assurance of progress.

“We've moved from the analytical stage of options to the working stage of options,” he said.

Some analysts question Level 3's motivation to move now. C&W's network doesn't add anything to Level 3's already vast and able IP network, according to Nancy Bedard, an analyst with The Yankee Group. And if Level 3 were after C&W's customer base (the rationale that led Level 3 to buy Genuity a year ago), it would be straying from its wholesale focus. According to a C&W America spokesman, about 90% of C&W's 5000 U.S. customers are enterprises. Level 3's customers are mostly service providers, though the carrier won't give exact numbers.

“When [Level 3] bought Genuity, they didn't keep Genuity's enterprise customers on the data center side,” Bedard said. “That's kind of an indication that [retail] isn't where they want to go.”

A nationwide IP network with enterprise customers might be a better buy for an ambitious RBOC such as BellSouth or SBC Communications, Bedard said.

To some analysts, the upside in C&W asset sale lies in the urgency with which C&W wants to cut bait in the states.

“The question is, ‘What's the price?’ It's as [important as], if not more important than, the assets,” said Janco Partners analyst Thomas Friedberg. “The Genuity acquisition was the second most important thing to happen to Level 3 because they were able to buy it for almost nothing.”

Whichever company buys C&W America isn't likely to get the kind of steal Level 3 did when it bought Genuity, Friedberg added. Moreover, offers could come just as easily from investment firms as from carriers, as Level 3 learned earlier this year when its pursuit of Global Crossing was usurped by a Singapore telco and a Hong Kong investment firm.

“There's a lot more competition for assets now than there was [last year],” Friedberg said. “You have a lot of grave dancers turning over rocks.”