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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