Level 3 Prepares For M&A

July 1st, 2009 by · 10 Comments

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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Categories: Internet Backbones · Mergers and Acquisitions

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10 Comments So Far


  • dm says:

    They will likely buy something and also issue new debt to take out some more debt maturing over the next few years to give them a longer run way. That’s why the debt issue could be bigger….enough to buy sprint, or classic q, plus more to lengthen maturities and satisfy sprint or Q if either is considering a jv. There may not be a deal imminent…could be just getting ready…who knows. Doesn’t matter. Consolidation will be big, as supported by the Verizon victory last month in the DC court of appeals on forbearance.

  • carlk says:

    Why would a money losing, p.o.s, cash strapped company like (3), flush $4M in valuable operating cash down the drain for something not completed once approved?

    Who owns the majority of those bonds? Sadly, they gave the opposing side, it seems, no worries over the long weekend.

    • Notrom says:

      Carlk—-You miss the point ——-They have a done deal including financing . They have to get this bondholder approval before things can be finalized . Getting a waiver from the bondholders re added debt & gov’t approval if necessary are the final steps . I would expect an announcement shortly after bondholder approval is acquired on the 15th of July .

      Just to bring things up to date, LVLT is now earning money—they will be Free Cash Flow positive for 09 . I would expect any deal that they do to be immediately accretive to F/C/F .

  • Dave Rusin says:

    I don’t think the need more long haul. I could be wrong.

    I think they may have figured out where the margins, growth and strategic positions are by the results of their last run of M&A.

    Think local, act local — IP packets will take you anywhere globally.

    • Notrom says:

      Dave R ——- I do not think LVLT is interested in buying a longhaul network per se —However, buying the revenue on an existing longhaul network,giving them greater scale & profitability is another matter . Furthermore,closing down another longhaul network is a step in the direction of better pricing .

  • carlk says:

    Notrom, after so many years of heart felt disappointment, isn’t cynical skepticism healthy in this potentially outstanding stock today? 🙂

    I’m in sync with you, once again. However, I am always prepared to be wrong while waiting for the ultimate conclusion. Too much history supports that view. Suspending “disbelief systems” in this security remains suicidal especially while considering the dubious players in the nebulous world of “hedge funds.”

    If it’s a really good deal though, one could hope for a fast resolution in advance of July 15th, I guess. 🙂

    I am optimistic that there would be “less” in the way of “integration mess” whilst potentially shutting down traffic on one older network, and migrating it onto (3)’s most efficient backbone.

    On the other hand, Dave R’s suspicions point to more metro, potentially in the form of TWTC, possibly?

    Since this debt ratio points to a “mother load,” maybe we’ll see a combination that goes beyond just one name, and one specific focus?

    Happy Liberty Day, Morty, Rob, and others! 🙂

  • CzyBrit says:

    Perhaps a M&A with Cavalier/Intellifiber?

  • ES says:

    although Sprint denies that the Ericcson deal does not precludes M&A – is that believable?

    • Justin says:

      So, now that the solicitation for LVLTs 2013 notes expired any insight on there next move with M&A?

      • Rob Powell says:

        Basically, it limits the amount they can raise for M&A at the Level 3 Financing level. It therefore probably precludes a deal of the size of Qwest longhaul or Sprint wireline entirely, but not others like XO or Global Crossing.

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