A Few Random Thoughts on the LVLT/GLBC Deal

April 13th, 2011 by · 22 Comments

A few more random thoughts about this weeks big deal between Level 3 Communications (NYSE:LVLT, news, filings) and glbc.

Why so long to close? While Level 3 has historically closed deals in about three months, there is a reason they gave themselves until the end of the year this time.  When Global Crossing bought Impsat, it took them seven months to close the deal due to slow regulatory progress in Latin America - particularly with Conatel in Venezuela.  I don't think Venezuela has become, shall we say, more interested in smoothing the road for a US based telecom.

Not everyone is jumping up and down with joy over the deal. XO has been one of GLBC's main metro access providers in the US.  Since LVLT is surely going to move what it can onto its metro footprint, some of that will come out of XO's hide.  Infinera provides both LVLT and GLBC with much of the DWDM gear that powers their bandwidth, and the consolidation of those inventories mean capex efficiency - and capex efficiency means needing less equipment.  And the GLBC fiber in the US is built on fiber from the Qwest network, now owned by CenturyTel who is collecting the O&M for it.  Some of that fiber will get returned, much as that of Genuity did back in 2004.  And both EdgeCast and Limelight will be losing  a longstanding carrier resellers of its CDN services - though I don't think that's ever been all that large a phenomenon for Global Crossing.

Will IP transit prices find greater stability? Wholesale IP transit as a business has been one of the toughest neighborhoods in telecom for a decade.  Level 3 and Global Crossing are big players in it, and they sit at #1 and #2 on top of the Renesys rankings.  Their combination could theoretically change the dynamics.  But actually, I doubt we will see much of a shift.  The two cater to different arms of the sector, but the price drivers have always been the Cogents and Hurricane Electrics and the other hungry smaller networks.

Is there a cloud in Level 3's future? Until now, they seem to have focused mainly on serving bandwidth to cloud providers.  But combining Level 3's US and European datacenter footprint with Global Crossing's large enterprise and multinational business would seem to give them the assets to move deeper into it directly.  Perhaps we shouldn't think of another network as Level 3's next M&A, but rather a cloud-related technology acquisition - or buildout.

Transatlantic possibilities? It's been a decade since either company has built a new cable, but with the extent of their US/European revenues and the fact that AC-1 and AC-2/Yellow will probably maxed out soon even with the recent upgrades, might the merger not give them the impetus to build the next transatlantic cable?  After all, Hibernia Atlantic is building one now for latency which will challenge Global Crossing's AC-1's current speeds for NY-London, and Level 3 has had a strong interest on all major legs of the the low latency marketplace since the beginning.

Categories: Cloud Computing · Internet Backbones · Mergers and Acquisitions · Undersea cables

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22 Comments So Far


  • Justin says:

    Rob, what are your thoughts in regards to the Comcast & 3 dispute with this merger when it comes to handing traffic back an forth? Does Comcast handoff traffic to GLBC? I’m curious of what this will do to the balance of exchange or net neutrality issues.

    • Rob Powell says:

      I think it will be 9 months or more before the close, and a year or more before the IP networks are unified. By then a lot can happen, so this is probably a secondary consideration. That said…. While it would even out the traffic ratio a bit, the traffic ratio has never been the issue here. All it would do is shift the public arguments, while the underlying dispute over OTT video stays the same.

  • ES says:

    Rob,

    What’s your opinion on the likelihood of Verizon pulling a robber like they did on MCI from Q. The premium is large but aren’t those synergies available to a VZ as well?
    Eric

    • Rob Powell says:

      While theoretically possible of course, it seems unlikely to me. Verizon would face much greater regulatory scrutiny, and Global Crossing has been available at higher prices for years during which Verizon didn’t make such a bid. Bottom line for them is that they don’t have an underlying need to add scale by paying a premium, while LVLT does.

  • anonymous says:

    With GLBC’s $5.9 billion dollar Net Operating Loss (NOL) transferable to the combined business, the acquiring company will save billions in future tax payments.

    GLBC is worth way more than $3 billion. And it might not be a sure thing for the deal.

  • The NOL transfer from $GLBC to $VZ isn’t possible due to accounting rules. $GLBC would need to buy $VZ for that to happen. It is a grey area, but for the most part an impossibility.

    • anonymous says:

      Not so sure about the “impossibility”.

      If that is the case, there is no needs for LVLT to take measures to adopt “a shareholder rights plan intended to protect the company’s $5.9 billion in net operating loss carryforwards.”

      Of course, the merge benefits both companies, and the entire industry as well.

      • Rob Powell says:

        Level 3 has so many NOLs of its own, the addition of the GLBC tax assets probably doesn’t make any practical difference. Their rights plan is designed to protect their ability to use their own tax assets, not those they are acquiring. Also, my understanding is that the ability of an acquirer to use such assets is substantially restricted as compared to the original owner.

  • ES says:

    VZ doesn’t get the tax saves but they do get the network saves, no?

    • anonymous says:

      This is a response to both ES and Rob:

      You’re right LVLT has tons of NOLs accumulated for the past decade, and the NOLs from GX (valid for how many years?) do not make a lot of sense for the purchase. If L3 were profitable, the deal might have happened much earlier, and L3 might be willing to pay a higher price.

      However, to the right party, it would be a different story.

      Yes, the use of NOLs is restricted. However, to the smart guys, it could be gold. The restriction did not deter Leucadia’s acquisition of WilTel, used all the NOLs, then sold the skeleton to L3 two years later in December 2005. The ongoing legal fights around Carl Icahn, and R2/XO minority shareholders are centered about the $3.5 billion NOLs accumulated by XO.

      Hopefully, the deal shall go through without a glitch. And there is the $50 million break up fees 🙂

  • jjl says:

    To your first question above
    GC has a long tradition to make deals negotiating until the “last blood drop” is in Mc Shanne’s DNA
    So it will take long and will be at leas 2 deal breaks episodes is in their script
    is GC’s way

  • jjl says:

    “Not everyone is jumping up and down with joy over the deal.”
    Reason is clear is not a good deal for L3 Shareholders ,and if you are GC shareholder , it depends when you came in .
    In 2007 after Buying impsat share was 22/25 if you bought shares there you are leaving empty
    Of course if you bought share at 8 at the end of 2008 you should be happy ,did you? I did not.too risky remember December 2008?
    The only winner of this transaction are Temasek guys who got in a very cheap price and Legere and his bunch fo incompetents they are getting more of 80 million(look at proxy)
    They were masters in firing people and cutting cost(only working in the low part of P&L Sheet
    They never brought to the company a customer that you can say “ohh well done”
    By the contrary they lost Camelot in the UK to Hughes a 300 mill a GCUK’s customer for many years.
    Still Worst ,some of them will not leave the company L3 already decided to keep at least One of them
    So they are paying a fortune to Keep it.
    It is crazy
    but is that way it is

  • CarlK says:

    This tiny CDN phenomenon you just alluded to Global Crossing not excelling at, just became a 200 pound Gorilla in the Midst.

  • JH says:

    With all the new shares to be issued (~1.3B) looks like combined entity will be approaching 3B shares…what is the chance of a reverse stock split either before or after the deal closes?

  • STL says:

    Rob – does Broadview Networks ever enter into the M&A discussion? Their largest shareholder (MCGC) has publicly expressed an interest to divest its ownership. BV filed for an IPO years ago but an M&A transaction is a much higher proablility? Any thoughts on the attractiness of their footprint and the liklihood of a takeout? thanks

  • Doodles says:

    Who will be the first cableco to buy one of the few national footprint CLECs?

    • Rob Powell says:

      The thing about the cables is that they often don’t think of themselves as national, but as a collection of territories outside of which they have no advantage. No national CLEC fits that mindset particularly well, which is why I think it hasn’t happened. Smaller CLECs with more focused markets are more likely targets. All IMHO of course.

  • Anonymous says:

    Doodles comment was very interesting to the M&A discussion, with cable essentially running a subsidary CLEC companies under their main cable business you would have to think to expand and compete with ATT/VZ there identified opposition they need to expand out of there territories. In fact I think Rob alluded to Comcast small chicago acquistion as a trial balloon whne it happened. Once again XO comes to mind as a target. They seem to have waited themselves into a very enviable position with strong local assets and IRU long haul networks.

  • ES says:

    My version of the end game is that at some point the TWs link back up.

  • KC says:

    Rob,

    Any more color on Broadview?

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