Level 3 Assessing its Colocation Business

Level 3 Communicationsis doing a "detailed strategic assessment" of its colocation business, and is likely to invest in additional space, power and cooling capacity in its data centers, company executives said. That has led some Level 3 watchers to wonder whether the company might consider selling or spinning off its colocation business.

"Our overall colocation or data center business has been growing at double digits every year over the last years," said Sunit Patel, Level 3's Executive Vice President and Chief Financial Officer, in the company's recent earnings call. "And now we are at a point where with some investment, we can keep that going and we are looking at that."

'Strategic Importance' of Colocation Business
"This is a matter of some strategic importance," added CEO Jim Crowe. "We're doing (a) review that's largely completed. We'll make some decisions here in the coming months. Our data center business would be one of the larger colocation data center businesses in the industry if it were standalone. It's a big opportunity for us. We want to be sure we take advantage of it properly."

Level 3 has about 70 data centers in its network, and the company claimsa footprint of 5.6 million square feet, although some third-party estimates are lower. Patel said the company is assessing the available space and power across its colocation operations.

"In some cities we are getting close to filled up," said Patel. "In other places we have space. The bigger issue is power. We have to look at power limitations and it's different for every city. In some cases, it's things like the time it takes for utilities to bring in power to you; in some cases, we need to upgrade our power infrastructure in terms of cooling capacity and the generator battery capacity."

Spinoff or Sale? 
Rob Powell from Telecom Ramblings, who tracks Level 3, recently examined the question of whether the colo business might be packaged for sale or a spinoff IPO. His conclusion: this would be difficult, given the capital investment required to expand aggressively in the colo market.   

"For one thing, (the colocation operation) would be very difficult to separate," Rob writes. "Level 3 uses much of these facilities for its own operations and would of course still need to do so.  They are deeply integrated with the rest of the company’s business, and there would be substantial integration expenses required (or is that disintegration expenses?) just to make it ready. 

"But more important is perhaps the fact that only a fraction of their footprint is really of the type that competes with Equinix in the main colo markets and most of that is largely full," he continues. "The rest is often in less active colocation markets or has space or power limitations that other providers solve by simply building giant new standalone facilities.  Despite how it might look on paper, separating this segment would be more costly and painful than one might think, would bring in less money than one might project, and would very much distract Level 3 from solving its real problem of finding a path to real growth in the world of bandwidth."