Sunit Patel, Level 3 Communications: Consolidating big business
With a wealth of financial experience both in telecoms and on Wall Street, Sunit Patel, CFO and EVP at Level 3 Communications, tells Kavit Majithia where he sees the company’s next big profit wave coming from.
Where others tried and failed, it was Sunit Patel and his team that secured the biggest consolidation story in telecoms during 2011. Level 3’s purchase of network operator Global Crossing, finalised in October in an all stock deal worth approximately $1.9 billion, was beyond question a major coup for the carrier and one that gives it, among other things, a major presence in the important developing markets of Latin America.
For Patel, access to a profitable longhaul and metro network and data centre facilities in an emerging region were just two of the factors to consider when taking Level 3 towards its biggest acquisition to date. In a volatile global market, Level 3 is taking on a substantial amount of debt with Global Crossing, which effectively means Patel, in his roles as CFO and EVP, has put his own neck on the line.
“One of the key focuses put on the team, and on myself, was the ability to refinance Global Crossing debt in such a short space of time,” says Patel. “Between the announcement and the transaction there were several processes to go through, including arranging bridge financing with banks to ensure we had the financial resources to complete the acquisition.”
Patel identifies that Global Crossing has the scope to improve the company’s balance sheet, and with respective synergies improve its free cash flow generating capability.
“We have set the goal of achieving $300 million a year in cost savings from the acquisition, in addition to saving 5% of the companies’ combined revenue – equating to a further $40 million a year,”says Patel. He adds: “Bandwidth demand is becoming global and it is driven by people’s need to interact more visually, rather than with their ears as has been the case historically. Latin America is still in an early stage of development in terms of maturing demand for bandwidth in comparison to the US and Europe, and there is certainly a prospect for double digit growth in the region – a scope that is given to us through the Global Crossing acquisition.”
Risking on potential
Risk, however big or small, is something that Patel is not averse to. Today, moving to a senior management position in such an important company would seem like an unambiguously golden opportunity, but back in 2003, Level 3’s position wasn’t anything like as strong as it is now.
The entire strategic premise that Level 3 is now founded on, with growth coming out of increasing demands for bandwidth, wasn’t where the company or market trends appeared to be heading in 2003, which created concerns internally.
“The company certainly went through tough times,” reflects Patel. “A lot of its issues date back to the late nineties, post deregulation when billions of dollars were poured in to the industry resulting in a massive oversupply. This resulted in numerous companies being wiped out, and a few of them were companies that Level 3 bought or merged with over the years.”
Rising cost per bit
Failure to live up to its own mission statement, and to establish itself as a primary US wireline provider is something the company has certainly flirted with, but the rising demand for bandwidth on next-generation networks is certainly what will take Level 3 in to a new age of profitability, according to the company’s long standing CFO.
“Level 3 was always about the future of wireline telecoms, and this was a huge reason why I was excited about joining the company,” he says. “I focus on leveraging this network and ensuring there is appropriate scale and utilisation, which in turn means such investments secure profit. The key in today’s market is establishing a low cost proposition which is why we are seeing such an explosive growth in demand. Dealing with this increasingly low cost per bit and providing access to our customers rapidly is a huge task. To do that requires a level of scale and consolidation. The price elasticity of demand is where this explosive demand comes from – and as the percentage cost per bit decreases so does the cost per bit that is paid – being a low cost innovator means we will continue to drive a lower offering.”
When noting Patel’s strategic focus in tapping in to the rising demand for bandwidth, it is important to note the company’s presence in various metro markets, which has only increased as a result of the Global Crossing acquisition. The merged operation now boasts a network spanning 27,000 metro fibre miles, and through its extensive capillaries, Patel says the company’s reach extends to over 140 cities through metro fibre. “This reach is generating the incremental returns that justifies us in serving our customers better than our competitors meaning that the rising demand for bandwidth we are seeing is more advantageous for us than our competitors,” says Patel.
So how important is the demand for bandwidth in today’s market? “When you see surveys from college students that rank the need for bandwidth higher than even water or air, you realise that this capacity provided on networks is becoming an actual basic necessity,” he says. “Even in markets like New York or London, this requirement is not being adequately served so the demands to address this in the metro markets are huge. As things move more towards video, I can see a strategic opportunity to deploy the extensive capital investment made available by the company almost a decade ago in metro markets where our customers are continually being underserved. The entire industry is becoming increasingly global, and for most companies there is a requirement to reach its customers and provide adequate bandwidth services. This could be providing multinational services in the content sector, on web portals, search engines or the financial sector, and I believe this opportunity makes us unique.”
Level 3 established itself firmly as a consolidator in the US market in 2003 after Patel became CFO – and he is widely revered for driving the subsequent acquisitions of WilTel Communications, Broadwing Corporation, Looking Glass Networks (where Patel also served as CFO), Progress Telecom and Telcove. But for a former Wall Street banker, who dealt with multi-billion dollar M&A activity in the oil and gas sector for a private investment bank, he does note his role in the now evolving telecoms industry is certainly, day to day, moving at a slower pace than his previous experience in the largest banking platform in the world.
There is, however, a lot more variety involved in the job he is now employed to do. “The pace of Wall Street is largely different – it’s intense. It’s a top business, and everyone is trying to win business. Predominantly it is relationship driven but still transactional and a lot of it is about advising clients on the right moves to make – whereas with Level 3 it is more operational which will help shape the overall business,” Patel says. “Working for a public company that is driven by a quarterly and annual cadence in terms of reporting and budgeting cycles, there is a certain tempo and seasonality that goes with it. There has to be an element of industry knowledge deployed, and how you cater certain critical variables to make money from potentially treacherous service areas.” A slower pace in his present role has certainly not meant Patel has been afforded an easier passage for success in his professional career. He points to a constant thought process behind each decision he makes, and given external factors, including the macro environment and the financial markets there is a necessity to manage the risks to ensure the company does not run into any potholes.
While Level 3 and Patel can indeed paint a successful picture of the past year, under Patel’s experienced tenure the company has not always been sailing smoothly both financially and internally. In 2007, the market was informed and the national press reported that Patel was to step down as CFO in 2008 because management believed he was ill-suited to lead the company to completing particular projects he had helped build. Investors reacted angrily at the time to the news and Level 3’s share price traded 9% lower following the announcement, with several market analysts claiming the company was using Patel as a scapegoat for its financial problems. In a dramatic u-turn, 2008 saw Level 3 end its search for a new CFO and it was co-founder and COO Kevin O’Hara who left the company, sparking further rumours of a power struggle within Level 3. CEO James Crowe said in 2007 of Patel: “As many have observed, over the last two years the improvement in our financial strength has been nothing short of spectacular. Sunit and his team can be rightly credited with a leading role in this achievement,” he stated. “As the company focuses on ensuring we take full advantage of the opportunities presented by our marketplace, we believe we need a CFO with skills and experience which emphasises both operations and financial management.” It appears, based on 2011 developments and a focus on a profitable growth sector, a renewed trust in Patel has paid dividend to Crowe and the rest of Level 3.
History: Level 3 was founded in 1985 as part of the Kiewit Diversified Group (KDG), a subsidiary of construction company Peter Kiewit Sons (PKS). In 1998, KDG announced it was changing its name to Level 3 Communications after substantially increasing its emphasis and resources on the communication and information services business. Level 3 raised $14 billion in the same year and used the money to construct 19,600 route miles to build an upgradeable network fully optimised for IP. By the end of 2000, Level 3 provided service to 2,700 customers. The company continued investments in infrastructure and expanded its assets, acquiring Genuity in February 2003 and WilTel in 2005. Other acquisitions have included Progress Telcom, ICG, TelCove and Looking Glass Networks in 2006 and Broadwing in 2007. In 2011, Level 3 combined with Global Crossing.
CEO: James Crowe.
Revenue: The combined Level 3/Global Crossing business had 2010 revenues of $6.2 billion and pro forma 2010 adjusted EBITDA of $1.3 billion before synergies and $1.6 billion after expected synergies.
Network: With the acquisition of Global Crossing, Level 3 now has 100,000 fibre miles, more than 450 core network markets in North America, EMEA, Latin America and Asia, and more than 45 core network countries. In addition, Level 3 serves 170 metro markets with 30,000 metro miles. The company operates a global services platform and owns fibre networks on three continents.
Products and services: Level 3 provides a converged business network service, dedicated internet access service, private line services, rural internet access solutions, and VPN and wavelength services. The company also offers both local and long distance voice solutions, in addition to CDN and video broadcast solutions.