Level 3 and TW Telecom, a match?

Yesterday, the Denver Business Journal speculated that Level 3 may try to acquire TW Telecom ^[1].    Now, strategically, this combination has always made sense.  Amongst competitive telecoms, Level 3 has the premier backbone assets whereas TW Telecom has the premier metro assets.  Combined, the companies would be a force to reckon with even by the RBOCs, 17,000 on-net buildings in almost 150 markets and both the premier wholesale fiber biz and the premier enterprise on-net biz.    Both Level 3’s Jim Crowe and TW Telecom’s Larissa Herda know this, and they always have.  In fact, with Kevin O’hara’s departure from Level 3 in March, the way would be open for Larissa to take over operations of the combined company as heir apparent to Crowe – a position that remains open.

Despite all this, such a deal is very unlikely anytime soon – in my humble opinion of course.  The reasons for this are short and simple:

• Neither company has a compelling need to do it.  When Level 3 bought Telcove and Broadwing and the various other metro companies and when TW Telecom bought Xspedius, each of these targets was facing choices – usually related to raising enough money for the capital expenditures needed to grow.  TW Telecom has the money for such capex and is spending it already.
• Level 3 doesn’t have the cash to do a cash deal.  Since they don’t need to do anything, TW Telecom would require enough of a premium to the current stock price to make it worthwhile – hence it would cost around $4B for Level 3 to buy TW Telecom.  In terms of cash, that kind of money just isn’t available right now from the debt markets, even if Level 3 weren’t in need of some refinancing regardless.
• Level 3’s stock price is too weak compared to that of TW Telecom, the dilution would be too expensive to justify.

So I don’t think this deal is going to happen this year, and probably not next year eiether.  Someday it will make sense and one will buy the other, but for now though they will continue to look at other dance partners.  One could speculate even that this rumor is a gambit by one or the other designed to draw attention away from the more likely candidates.  TW Telecom’s natural next target is XO, and Level 3 would surely like either XO or Global Crossing.  Why?  Because, both of those two targets have more compelling needs to do a deal and have valuations within reasonable ranges for a stock deal.