With the new M&A buzz being the possible JV between Level 3 Communications (NYSE:LVLT, news, filings) and Sprint Nextel (NYSE:S, news, filings), there will come a whole lot of articles which spread the rumor but don't delve into the nitty gritty. In fact, some will surely compare apples to oranges, and not realize it. Therefore, I thought it might be useful to take both companies' operational performance and put them side by side in as close to an apples to apples comparison we can manage. It cannot be perfect of course, but we can get pretty close just by following the following guidelines:
- Sprint's Voice revenues and Level 3's wholesale voice revenues are mostly equivalent, so let them go head to head.
- Combine Sprint's Data and Internet and Other revenues and compare against the combination of Level 3's Core Network Services and Other revenues.
- Include stock compensation in Level 3's numbers, because Sprint does not break it out for us at the segment level. This makes EBITDA comparable.
- Use EBITDA margin, not gross margin. Sprint uses a fully burdened gross margin, while Level 3 does not.
After following these rules, our comparison for Q1/2009 looks like this:
|Operating Expenses||1179||729||Not including D&A|
|EBITDA||286||235||Includes stock compensation|
I found this table quite surprising. If you were to scale Sprint's large voice business and the low ebitda margins it likely has to those of Level 3, the two companies look amazingly similar. Almost like twins! On paper, one might simply write the equation:
Sprint Wireline = Level 3 + $500M/quarter of low margin voice revenue
But of course, there are other factors which shift the equation back in Level 3's direction. First, the age of the underlying assets is wildly different. With no revenue on them, Level 3's fiber assets are worth much more than Sprint's. Second, in the Data/Internet category, Level 3 has far less 'legacy' revenue ($62M quarterly) than Sprint does ($228M quarterly - both Data and other).
If Sprint Wireline were for sale, what would it be worth in today's market? Annualizing the above and putting an EBITDA multiple of 5-6 on it (see here for why this multiple is appropritate) would yield an enterprise value of range of $5.8-6.8B. Obviously that doesn't include any net cash or debt, since Sprint Wireline doesn't stand alone and we don't have that number. But it does give us a general idea what it's worth, and that in turn may help us figure out how particular JV arrangements might or might not work.
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