Back in July I posted that big money might return to telecom in the form of enabling acquisitions. Apparently I was much to early, the opportunities then seemed clear to me but they look petty and small compared to those in the current environment. As the financial crisis deepens, it seems inevitable to me that the vultures will find value somewhere in the sector before long.
The last time was 2002-2003, it was the darkest time for telecom following the bursting of the tech bubble when Carl Icahn, Carlos Slim, Leucadia National, Wilbur Ross, Singapore, and Warren Buffett each came riding in on a white horse to save a company. The risks were much higher then, every company in question was burning large amounts of cash whether in bankruptcy or not. The glut was in full force, the business models looked horribly broken - yet they saw an opportunity.
Now, in the throes of this newest financial crisis we see much better bargains available. The valuations are way down but the business models are looking increasingly solid, even healthy, even supply and demand are in balance. The economics of fiber and data are much better understood now than they were during the bubble, it has become increasingly easy to value the assets and predict the cashflows various assets might generate. We have already seen Buffett spend some money on GE and Goldman, seeing opportunity in their need for cash despite the risks of catching a falling knife. Well, there is opportunity as well in telecom and I expect it will get noticed sooner or later. Money is an enabler, and with the credit markets in a deep freeze it means the sector can't take advantage of opportunities the way it otherwise would. As prices fall, the prospect of enabling those opportunities becomes increasingly lucrative.
Level 3 (LVLT) for one will need to refinance some debt next year, and even if they manage to do so without issuing stock they would also probably like to do some M&A at these prices if they can. Leucadia dropped LVLT stock like a hot potato after the Wiltel acquisition, but that was at over $3 with substantial cash burn. At under $2 and generating positive cashflow, it may be an entirely different story. Buffett doesn't know tech, but it didn't stop him from making good money on LVLT converts the last time. A commenter here has already shown me evidence that Buffett's General Re picked up a pile of LVLT bonds, certainly he is watching.
One could also see TW Telecom (TWTC) or even Global Crossing (GLBC) seeking some enabling cash for an acquisition in this environment. Suppose Singapore took advantage of the situation and offered Global Crossing enough cash to solve their USA last mile problem? Dilutive or not, both might win in that situation. Such opportunities won't go unnoticed forever. There is plenty of smart money out there looking for a home, if the big money players found telecom to be an attractive place to make a buck in 2002 when the sky really was falling for telecom, can there be any question it might happen now? The best opportunities come when someone doesn't *need* the money but certainly could use it to great effect - low risk and high reward.
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