A Higher Bid for PAETEC?

October 6th, 2011 by · 11 Comments

Reports this morning are suggesting that another bid may soon materialize for PAETEC (news, filings), sparked by some analysis from FBR suggesting that Level 3 might be able to bid $7.30 per share. The stock has risen above the value of the Windstream (NYSE:WIN, news, filings) deal announced back in August, reflecting speculation that this analysis could turn into reality - though it does seem to be a small effect so far. It might be true that Level 3 could justify a higher offer, however if someone does jump in at the 11th hour I don't think it will be them.

First of all, Level 3 doesn't need this right now at a time when it is very consciously emphasizing not screwing up the Global Crossing integration. And while Global Crossing is a backbone and simpler to integrate, PAETEC is most definitely not. They have a very wide ranging enterprise customer base and lots of regional and metro fiber that would certainly be more difficult to integrate properly at this time. Level 3 might be interested, but I don't think they'd be motivated.

Secondly, according to regulatory filings, PAETEC already turned down higher offers during the actual process when they could have slowed down the process. Those offers appear to have come from Earthlink, while Level 3 is rumored to have queried but been unready to follow up. I submit that Earthlink is more likely to submit a higher bid now if there is an actual opportunity.  They are hungrier for a deal at present, and strategically it makes sense if they can get a foot in the door.

And thirdly, the reason given for PAETEC's choice of the Windstream offer over higher entreaties was that other buyers didn't have the financing in hand.  Level 3 doesn't either right now and neither does Earthlink, so what has changed? If you want to find a buyer with money ready to go and timing that makes sense to jump into the process at this late date... I hate to say it but how about Carl Icahn and XO?

That's money that could move in right away, and it wouldn't at all be contrary to the man's style.  One can make a strategic case for it as well, as the fiber assets each has are rather complementary, as are the customer bases.  There would be substantial available synergies.  If Icahn were ready to switch gears now that he owns all of XO, he *could* make a real go of it. But I still doubt he will.

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Categories: CLEC · Mergers and Acquisitions

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11 Comments So Far


  • Anonymous says:

    Maybe Integra with there new leadership have decided they can grow into one of the big boyz. KOH certainly thinks big

  • schmuckinsurance says:

    I agree Rob. As ERH and other close followers know I have a point of view here but I really could not see L3 doing any deal right now other than Limelight for all the reasons Rob lays out and some he leaves out.

    Would be curious to get this board opinion, b/c the market believes I am wrong but here is my rationale on why LLNW makes sense:
    (1) Limelight is a technology purchase with a manageable amount of integration needed.
    (2) It is an area they are keenly intent on growing.
    (3) It increases their customer base.
    (4) It is a company that was closer to GLBC which is now in house – that demands a reason to sit down at the table.
    (5) It is an area according to Jim Crowe where gross margins quite appealing even to Level 3.
    (6) It is a market they are already know which has a pricing problem that consolidation would help in. People forget that even leaded gasoline was a good business when competitors exited for unleaded gasoline.
    (7) It adds to their IP position. At today’s prices, they could likely acquire the company just for the purchase price they paid Saavis for their CDN IP.
    (8) It is delevering even to the 4.4x debt/ebitda company when 70% of LLNW mkt cap is in cash.

    So how bad is the business falling apart or how serious are the google & amazon threat in order for this to be wrong?

    • Rob Powell says:

      It’s not unthinkable, in fact it’s probably more likely than PAET right now. But my hesitation comes from the facts that I don’t think LVLT needs to buy the technology and that the revenues might tend to flee due to single-homing. Could be my own ignorance though.

  • Anon says:

    yes, it is unthinkable. not sure FBR understands the difference between IP backbones and PSTN — this speculation is hard to justify.

    why exactly would Level3 want a low margin, heavily indebted CLEC ?? Paetec lost money last year and last quarter (after debt service). and has a huge intangible asset. this helps Level3 how? Level3’s CFO is waaaaaay to smart for this one… the opposite of the de-levering, reach extending, margin enhancing Global Crossing deal.

  • en_ron_hubbard says:

    Engaged in other thoughts right now, so not focused. Given that and fwiw:
    — no way LVLT makes a move right now. It would be a shot in the foot (but then…..)
    — XO is bumblefucking along quite well on its own and could not handle an outside distraction
    — ELNK is the only logical suspect, but if true it took a surprisingly long time for them to get the financial eggs in a row

    My suspicion is that this is nothing and the deal closes as contracted but I am emotionally equipped to be proven wrong.

    • en_ron_hubbard says:

      Oh, I forgot Integra!

      — Forget it. Owned by a bunch of credit funds, changing leadership (again) overmaxed on credit with zero growth in this environment. Real good candidate!!

    • Mr Poppers says:

      You are so correct on XO. Laura Thomas is incompetent and cant get out of her own way. She will disintegrate whatever is left. If she doesn’t the new network guy Rob Geller will!

  • schmuckinsurance says:

    ERH, as a CTL and L3 shareholder, any thoughts on CTL’s appetite for a $2.95B mkt cap Englewood, CO based long haul network as Oppenheimer today purports?

    • en_ron_hubbard says:

      Now , that’s interesting. I read the material. Both companies are busy integrating so nothing is likely in the short term. Long term, CTL MUST move away from the land line business. They must, and they have that inherent but dwindling FCF do do just that. The same imperative exists for ELNK and WIN who have both been trying (and succeeding) in buying enterprise revenue.

      Given the Q assets, CTL is a very logical buyer for LVLT– not now but perhaps sometime. It is up to the LVLT management to make the price too expensive so that it never is a relevant issue.

      As to the Q integration, they say it’s going just fine. I know no more than that.

  • schmuckinsurance says:

    also curious if you any sense for how the Qwest integration is going?

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