M&A Journal: Thoughts on the Likelihood of a LVLT/GLBC merger

May 14th, 2010 by · 28 Comments

Lately there have been various research reports hinting or outright speculating about a consolidation event between Level 3 Communications (NYSE:LVLT, news, filings) and glbc.  Additionally, I hear new rumors almost daily about talks between the two, and the frequency of Google searches on the subject that reach this site have been spiking for weeks.  Whether or not there is fire under all that smoke or not, there is a steady buzz of speculation going on right now.  I have written in detail about the strategic attractiveness of this combination before and the hurdles it faced, but it was quite a while ago – almost 2 year now and prior to the recession we are now recovering from.  Does such a deal still make sense?  Oh yes, and I feel that it is more likely to happen this year than ever before.

The general outline remains the same. The reason this potential combination worked on paper then and still works now boils down to local fiber assets and scale.  Global Crossing has two businesses (GCUK and GC Impsat) that have 20-30% EBITDA margins because they have local assets, but the remainder does not and therefore has less than 10% EBITDA margins.  Level 3 has metro assets in the USA and continental Europe, and the synergies those assets could bring to Global Crossing’s $1B+ Rest-Of-World transport and data revenues there are very powerful.  Add that to the overall longhaul consolidation synergies associated with running one network rather than two, and you have several hundred million dollars in extra EBITDA on the first squeeze of the orange alone.  The resulting company would have matching metro and longhaul assets in virtually all major markets across three continents – each able to stand on its own and generating sufficient cash flow overall to handle the debt load while allowing more than enough capex for growth.

Is Level 3 ready? Those skeptical of the wisdom of such an M&A generally have one main objection:  that Level 3’s problems over the past few years show that the last thing they need is more stuff to integrate, and that a merger wouldn’t solve their problems finding organic growth.  That’s true in many ways, but it’s also beside the point.  Level 3’s need for organic growth is derived from its greater need to grow into its debt load – to lower the ratio of its long term debt to EBITDA.  That debt and the need to keep juggling it act as handcuffs, limiting Level 3’s options at every turn.  If they can overcome it, they will have much more capex available to invest in growth and finally break free from the current endless refi cycle.  Certainly there are risks involved in the combination, but for Level 3, size really does matter.    While they are close to being large enough in that cash burn is minimal now, the expensive refi’s they were forced to do when the credit markets froze over last year showed that the balance of power remains on the side of bondholders.

Why would Global Crossing be similarly willing? They’ve been quite open about their interest in consolidation for a couple years now, but why?  Because they have done as much as they can with their current asset structure, improvements now are incremental but margins remain low.  The company has worked miracles since emerging from BK in 2004 still clothed in rags financially.  They have brought EBITDA back from the abyss into positive territory even outside of their GCUK and Impsat divisions.  But they still lack the metro fiber assets they need outside of the UK and South America, and they can’t make further major improvements in margins without them – some yes, but there’s only so far you can go on someone else’s metro assets.  However, they don’t have the capex budget to build their own and such metro assets right now trade at much higher multiples than Global Crossing does (e.g. Abovenet) and thus are hard, if not impossible, to justify financially in M&A.  The obvious solution is to merge with a similar carrier that has assets in all the right places and which really needs (and therefore values) the $2.6B revenue pile they bring to the table.  There is only one network operator that really fits that bill, and it is of course Level 3.

So there you have it. Level 3’s primary strategic need is for scale to match its debt, and Global Crossing’s primary strategic need is local fiber assets in the US and continental Europe to continue improving its margins.  Everybody wins, except of course those on the receiving end of the layoffs that would follow – but that is probably inevitable given the current likelihood of consolidation in the sector overall.  The risks of M&A are balanced by substantial rewards, and sooner or later it seems as if they must try it – if only they can agree on a price and find support for the deal in the credit markets.   It’s remarkable how little this situation has changed despite the economic hurricane we went through in 2008-2009.

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Categories: Internet Backbones · Mergers and Acquisitions · Metro fiber

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28 Comments So Far

  • ES says:

    Hard to quibble with any of your points Rob.

    The issue that I think has held Sunit back is the LVLT share price and the SEAM appointed private equity on the board.

    He knows that growth is around the corner and his currency will be in a different place if he can make it through into sequential growth land. With their enterprise division holding the line, that might be as early as the quarter that ends in 45 days.

    • Rob Powell says:

      Growth is always just around the corner, or so it seems! I would say that my thoughts here do not mean something is imminent, these strategic drivers aren’t going away – they will be the same 6 months or a year from now. Who knows when they would result in action.

  • Dave Rusin says:

    The combined debt – who would restructure that paper? Who would buy it?

    The cultures – too explosive to comment

    The execution – neither company has demonstrated good execution – they can however, spend money real well …

    The ego’s – who comes out on top is always the hidden behind the curtain issue. How about this crazy thought – merge and bring in an outside Chairman and new CEO for the new company …Maybe Ed Whitacre is getting tired of selling cars … (Whitacre wouldn’t know what to do in my opinion.

    Do a three way merger and let Larissa Herda call the shots …

  • carlk says:

    Dave Rusin, why don’t they bring your company public with this tri-merger that you envision, and you lead it after wards? What’s your house(s) looking like these days, since that’s the street talk casting palls over this Buccaneer Pirate, James Q. Crowe? Aye, Matie? 🙂

    • Dave Rusin says:

      If I were at the helm of a trifecta … six months later … you will say: Jenny Craig must be working with him …

      • carlk says:

        Would you implement a Richard Simmons exercise program with that, or something more draconian? LOL!

        • Dave Rusin says:

          An honest assessment of those value-adding and those that are not,look at layers of management, where decisions are being made or should be made but are not (silo affect, micro managers), freedom to innovate, freedom to improve processes ONLY to benefit customers, customer profitability pruning those we lose money on, focus on reliability and on-time delivery, exploit expansion from what we own not from renting from others aka type 2, limit financial reviews to 5-8 key metrics, sell off under performing businesses or assets to retire debt, make sure sales people are professional sales people not job hoppers, rid the organization of those in “management” that can’t delegate and motivate, all non-sales personnel are on the same bonus program including the CEO, you don’t pay bonuses if you miss plans or lose money, … I could go on …

          Get a cultural understanding compared to an ILEC and most cable companies … you are smaller than an ant … and that should be the strategic advantage in execution.

          • carlk says:

            How do you define “lose money” in the capital intense telecom space, i.e., by operating income or FCF?

            You’re no Richard Simmons, I’m happy to hear.

          • carlk says:

            O.K. Dave. Time to put you on my exercise machine!

            How about this for starters?

            The compensation package should be tied to the executives’ ability to generate free cash flow and to earn a high return on invested capital.

  • SquealingModems says:

    The thing you may not be considering is the large stake in GLBC that STT holds and whether the Singapore government would be willing to take LVLT stock as consideration in a deal.

    • Rob Powell says:

      Well, I wasn’t considering the structure of the deal at all in this post, just the drivers behind it. Some creativity would perhaps be required, but Sunit Patel is good at that yes? If they don’t want stock, give them converts perhaps…

  • carlk says:

    I think Todd and Notrom are onto the moving parts on how it this deal would go down, if and when Buddy Miller says it goes down along with Sunit’s blessing.

    Always remember that, the secret is in Sunit’s “sauce.” Never underestimate the use of quality, albeit sometimes expensive, Indian spices placed in the sauce.

    By the way, I love Indian food and their ways, especially if they’re on my side of the betting table! 🙂

  • Dave Rusin says:

    Sunit has nine lives … he was hit by a bus once …

  • The_highwayman says:

    I have to go with Dave here on his points here…one of the reasons why LVLT has struggled contantly can be attributed and in my opinion only is their CULTURE…

    During the shopping spree and after it was completed we saw, I cannot even count how many changes, in the BMG….We saw Bob Guth, we saw Lynn Refer, we saw change after change and then departure after depature….we saw this during the software spectrum phase as well… let’s face it…LVLT has always had ego and an institutional arrogance that seems pretty unmatched in the industry….

    One only needs to look at execs, i.e., Herda and Caruso that left MFS/LVLT and started their own ventures or took control of other ventures to see the cultural, execution and operating differences..

    I also do not think for a minute the recession is even close to being over and I think when commercial real estate pops and credit card defaults hit, it will be close or even to the subprime disaster….you cannot keep stimulating by printing money…I think the cash horde by the big guys is alive and well, because they know another tipping point is coming….just look at the regional and local bank failures…it continues at a rapid rate and is now even possibly accelerating…there is no real growth, there are no green shoots, it’s going to get much worse if we don’t stop federal spending and bailouts….

    I think one of the largest reason ‘s besides the ones already mentionned as to why a deal has not been completed is exactly what Dave pointed out…

    who is going to restructure the paper and who would buy it!?!? especially if the big guys see another freeze coming soon and honestly who would bet on LVLT actually being able to integrate and grow it…

    money may never sleep and greed may be at an all time high, but GBLC went ch11 and LVLT cannot excute and has sugar daddy’s…..I see the positives, but history involving LVLT is a cruel mistress and I maintain my negative view of them engaging in any MNA activity unless somebody elese takes complete control of the LVLT day to day and the BOD is dismantled….

    I also feel strongly that the parts of LVLT are more valuable than the whole….

  • carlk says:

    I love connecting dots with no pun intended surrounding wonderfully palatable Indian spices, but recently I heard Charles T. Munger opine about the fine virtues, social and business, which reside in Singapore.

    They’re smart business people being replicated by China it seems, and their owners are intimately aware of the score card between GLBC and (3 as respects opportunities and challenges. I would expect them to be rational in the near term.

    Further reference to Morty and Todd’s combination ideas with straight debt and conversions at or near today’s GLBC pps.

    Hearing Mr. Munger describe Berkshire Hathaway’s shift towards investing in the right “TECHNOLOGY MODELS” is also exciting for Berkshire shareholders to look forward to.

    Of course, I have learned sufficiently that, Messr’s Munger and Buffett are always about doing things at, “the right price!”

    Lastly, my sneaky smell says that, “Big Jim,” will not be the CEO much longer. The DRUM BEATS have continued way too loud, and a change of “leadership” remains IMMINENT!

    If by some wild chance it becomes a soccer mom-doubtful, but not impossible-maybe that Highwayman will finally STHU!

    If none of this should happen, then let (3) drive all the SOB’s back into their TELECOM GRAVES! imo

  • carlk says:

    Mr. Munger’s peer by age and wisdom. Meet Lee Kuan Yew of Singapore.


  • Anon says:

    Deal or no deal, the issues remain: too much debt, no enterprise revenue and execution. L3 now owns broadwing, WilTel, ICG, and several others. But much of the integration wasnt done (traceroute an address on old wiltel AS) and they have very very few enterprise customers (SME aint enterprise). L3 infuiates customers & wins low value, commodity xSP, hoster, porn and related business…. Mostly because att, vz and sprint wont take it at the price point and cogent, xo etc cant handle the lop-sided traffic mix. How does adding more cable help debt, execution & enterprise sales ??

  • carlk says:

    Are you saying that the King of porn traffic, Dave Schaeffer, had it put to him by (3)? That makes sense considering the quality of (3)’s network.

    I’m not sure of your facts being remotely correct even while comparing them to Sunit’s comments this week while in NY.

    Specifically, 100K roll up customers, customers that (3) describes consistently as small enterprise for years now, has been narrowed down to 13K.

    On the surface, one could make all kinds of wild claims about such a disastrous loss to a large customer base.

    Then again, if one trusts the management team, they have to believe they have now fixed the platform in conjunction with their target markets being medium and large enterprise customer revenue bases which they seek for their network.

    You would be wise to listen to their Q1 conference call too, with respect to Federal and large enterprise customers(Fortune 200’s) making up 20 percent of CNS, and building very strong growth momentum in real time.

    You would also be smart to review the revenue mixes in CNS that are very counter to your suggestions here:


    Which group of LIARS doth send you? imo

    • Dave Rusin says:

      Hey – do the research – porn has paid for many markets to opem up … what was the big porn app that drove voice mail? Pre-recorded 976 numbers.

      Look at the internet – porn was driving pictures first, now video, video uploads, 3D is approaching … you will have 3D porn long before you have 3D video conferencing!

      Don’t underestimate the importance of porn to the American economy and telecommunications!!!

  • anon says:

    no one is lying… like others, i have an opinion and perhaps look at the facts differently than do you… i don’t follow the relevance of “secret sauce” and all of the other stuff you reference.. i don’t think that my 3 points are all that controversial: (1) debt is what it is, read the filings at high rates of interest, this acts as a “pref” on profits that would otherwise be reinvested in the biz or used to pay down debt; (2) enterprise sales are lack luster and, according to you, largely acquired – this is problematic; and (3) and execution has been lacking — do you or anyone in the industry really contest this?? i don’t think L3 even contests this any more?

    Back to enterprise, even if they claim 20% is enterprise (i think the definition is the key), that means 80% is not. No one claimed a “disastrous loss” to this customer base, my view is that they never really built or grew this line of biz to begin with… ask a VZB rep how many F500 deals they lose to L3 ? they are more worried about Q, TW, and even Above. With good reason…

  • carlk says:

    (1) Debt is what it is for a reason. It’s their assessment of the “right size” for this $25 billion dollar factory’s long term output.

    (2) According to me, they bought those businesses full of small enterprise customers for strategic metro “ACCESS” points, to be a crucial cost differentiator as time moves forward

    (3) Federal and large enterprise is compounding at greater than 16 percent annualized in the current quarter. Medium enterprise is lacking, but that should change more favorably with the provisioning platforms ready after being fixed , and sales forces being focused locally and being added to at a high percentage rate as I write. Back orders are already up 15 percent.

    Once again, on the surface hearing those 100K customers via acquisition being denigrated to just 13K today, would sound DISASTROUS to most casual observers. The reasons and follow through results after this dark period, will determine who is right or wrong, as well as how GLOOMY, GLOOMY really is.

    You’re right though. You have a right to present a persistent BEAR CASE for as long as you choose to.

    Best of luck on that! imo

  • toddforthree says:

    there is no question that lvlt f’up the integration and went from 20% plus growth in 06 to zero growth in a quarter. the negative comments about the wholesale side is a lot like the negative comments on BNI until supply and demand shifted in their favor in 04. trying to pick that shift in power in bandwidth when you have a leveraged balance sheet is what has caused the equity holders in lvlt a lot of bad days. lvlt has to do a deal to speed up the supply demand equation in their favor and assure their survival.

    the integration appears fixed, that said it is hard to ramp that side of lvlt quick enough in 10-11 to make everyone feel good about the debt. for what its worth i think lvlt does better this year than the consensus thinks they will . that said, my cost basis is in 2’s so what do i know.

  • carlk says:

    Do you happen to have a handle on how many of the lost 87K customers from all of those acquisitions weren’t small enterprise? tia

  • Jose Antonio says:

    After 21 coments it is very difivult to have a conclusion
    as per my “friends” in there everything comeback to normal business. no more DD power points etc etc
    Despite the incentive to “change control” for GC’s boys looks like 60 millions
    wich is not bad at all.
    sit and wait

  • carlk says:

    FWIW, I think Crowe, etal, just dismissed the near term possibility of a GLBC acquisition, based exclusively on price. Mr. Manipulators are dropping GLBC’s price like a cheap 42nd street hooker as I write.

    Time to wreak further havoc on competing business plans tied to the MAIN WATER PIPES which (3) believes it CONTROLS for BROADBAND.

    Kill all the SOB’s and leave no prisoners standing! imo

  • Dave Rusin says:

    A 42nd Street cheap hooker … not even a Spitzer-like Hooker …


  • carlk says:

    Might you be suggesting Global’s not going down fast enough, Dave?

    There’s always tomorrow to look forward to!

    In the mean time, Spitzer had/has what was on the surface, a darn nice looking wife.

    WTH are some men thinking!!!!! LOL, imo

  • jose antono says:

    well I believe after this footbal(soccer) game
    the merge did not progress any more

    Click for larger image

    Back row left to right: Glynn Vaughan, Pervaz Khaliq, Lee Barnett, Martyn Blackman, Laurence Owen, Frank Jones, Neil Sutton, Nathan Ogilvie, David Arnold

    Front row left to right: Howard Mayne, James Ericson, Tony Jones, Timir Patel, Shelley Fryer, Safir Keshvargar, Neil Reeve

    World Cup Fever Begins with a ‘Friendly Match’ Between Global Crossing and Level 3
    by Kerry Smith

    May 18 2010 – Employees in London Bridge and Docklands formed a squad Fabio Capello would envy last month, when they played rival telco Level 3, in a friendly football match. It’s part of a programme of team socials organised by the employee experience committee in London.

    Tiziana Gentile, Customer Service Manager, is behind the initiative; “We are inviting everyone to organise games by inviting their customers and partners to take part. This is for fun and everyone is welcome to play and let off steam,” she says. “And if, like me, football is not your fort?, there is an open invitation to join in the post-match social gathering and celebrate or commiserate with the team!”

    “At the moment we are building the team by playing recreational football with customers and competitors in the telecoms industry,” Tiziana explains. “We have engaged BT and Level 3 so far and they are very keen to play more matches with Global Crossing. We will consider joining a Football league once we have a strong enough team to commit to that challenge.”

    It was an impressive performance from the team, comprising players from finance, marketing, legal, sales and engineering, but in the end, it was Level 3 who clinched the game with two late goals, to win 4-2.

    Approaching the half time whistle, Global Crossing were losing by two goals to nil, but undeterred, they managed to pull a goal back when Safir Keshvargar scored just before the break. Then, early in the second half of the match Global Crossing equalised with a cracking goal from Laurence Owen, only to concede two late goals in the closing minutes.

    If you’d like to be involved in the next game, or start training with the team, please contact Tiziana Gentile.

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