There are some balance sheet moves that don’t cost anything but which hint at M&A activity, and therefore can be used to feint. Others have a price tag, and generally mean there is fire under the smoke. Level 3 Communications (NYSE:LVLT, news, filings) today announced a consent solicitation for its 12.25% bonds due 2013, seeking to change its terms slightly in exchange for a one time payment of 0.75%. Essentially, in the event of an acquisition they want to be able to use the cash flows of acquired assets on a pro forma basis to justify additional debt. In layman’s terms, they want to be able to borrow against the assets they buy rather than what they already have, and they’re willing to pay $4M for that right. All of the other debt already has the new terms, they just need to update this one.
In their current form, these bonds seem to limit new debt at the Level 3 Financing level by not allowing the total to exceed 5 times the trailing four quarters of cash flow available for fixed charges. According to my calculations they had consolidated cash flow available for fixed charges of about $950M in 2008, which would support perhaps $4.75B according to these covenants and although Level 3 Financing had $4.2B already there was some $500M in room left. The number is likely more now given the improvements in cash flow in the first half of 2009, though I haven’t actually calculated it yet.
But for what? Given the fact that cash is king right now at Level 3 and every penny is scrutinized, this willingness to pay for possible M&A means this is not an idle whim on the part of CFO Sunit Patel and crew. While nothing is ever guaranteed they are probably quite serious about something. The above calculation implies they want to add substantially more than $500M in additional debt at the Level 3 Financing level to get a deal done, and that the target would probably have substantial operating cash flow of its own. It doesn’t seem likely that Level 3 could raise that much debt from the credit markets right now, and therefore they may be planning to assume some debt in a transaction.
There are really only two candidates out there that seem to have the size and cash flow to require this move, and debt they would really, really like someone else to assume. Those two are the wireline division of Sprint Nextel (NYSE:S, news, filings) and the longhaul network of q. If we take Qwest at its word that their network is off the market for now, and I do, then perhaps we need to take the rumored Level3/Sprint combination or joint venture a bit more seriously.
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