Last week, Level 3 Communications (NYSE:LVLT, news, filings) started the new year with a refinancing move, variants of which seem to be on pages 1-27 of its playbook. But is this really about getting an early start at chipping away at the 2013 debt pile? There are a few interesting points that suggest an M&A motive, and of course M&A is on pages 28-50 of that playbook for Level 3.
- The bonds could simply have been called in March for less than they are offering, so if it were just about refinancing what's the hurry in starting the tender now?
- The bonds being refinanced are also the same bonds they sought to simply modify covenants for last summer. What covenants specifically? The ability to use pro forma cash flows from an acquired company's past to satisfy a justify additional debt they would have to take on to buy such a company.
- The credit markets appear to be ready to support M&A in the sector, money is available and rates on new debt seem to be in realistic ranges.
- Reports suggest that the assets that failed to sell last summer are already back on the market (if they ever left): Qwest's longhaul business, Sprint's wireline business, and Global Crossing being the larger ones.
Now I can just hear some of you (highwayman yes that means you) spraying coffee and shouting that the last thing the company needs right now is more assets to integrate. Certainly the experiences following the acquisition binge of 2005-2006 would give anyone pause as to the wisdom of trying again, but there is always that old saying "When at first you don't succeed". Despite the obvious risks, Level 3's strategic position continues to be dominated by the fact that it has still not grown into its debt load and has actually been going backward organically of late. If the credit markets open wide enough to support a deal, I believe they will likely jump at the chance to change the game. Why not be conservative? In the game of chess, there are times where there is a safe, best move that loses, and an unclear move that you aren't sure about. You never ever take the former.
Some have suggested that there is already a deal on the table, else why would they not wait for March. I doubt it, I think they're just getting ready because there are so many possible candidates. Even if an opportunity does not materialize then the refinancing does help chip away at 2013. But eliminating the covenants will let them sit down at the various negotiation tables immediately, and that's enough to merit the relatively small extra cost of pushing for it early. They need that flexibility ASAP because if serious talks start they won't take long to conclude, if only because all these guys have talked on and off for a couple years now and there's not much left to talk about other than to agree on price and sign the papers.
So if LVLT were going to make a move, who would be the likliest target? Well, I've always been partial to the GLBC/LVLT combination, and my opinion hasn't changed. But I wonder if Sprint's motivation to make something happen might be higher.
If you haven't already, please take our Reader Survey! Just 3 questions to help us better understand who is reading Telecom Ramblings so we can serve you better!Categories: Internet Backbones · Mergers and Acquisitions · Metro fiber