There’s a post over on Seeking Alpha from this weekend provocatively entitled “Level 3 Communications: Is It Time For A Change In Leadership?” that I feel an urge to respond to. Now, one can argue whether Level 3 investors ought to be frustrated enough with the past decade to demand such a change, but it seems to me that actually making such a move at this particular moment would be an odd bit of lunacy. One month into the most important M&A integration project the company has ever undertaken is simply not the time to bring in new blood at the top that doesn’t know the business inside and out. But I don’t think the article was really calling for a change, but simply complaining about the stock price (now sub $20) in the short term in as noisy a way as possible.
Yes, the company’s stock price has faltered since June, but really what else could it possibly have done? Today’s environment is characterized by a hyperactive short-term response to everything, and it nearly always overshoots the mark. Level 3’s stock price surged last Spring on the promise of a deal that wasn’t going to close for six months, and for which the company would not see any actual benefits from for over a year. Where else could the stock price possibly have gone except back down as traders got bored moved on?
If they are successful – which is not at all dependent on the market’s opinion at this point – the stock price will catch up. Pro forma Q3 EBITDA not including merger expenses was about $350M ($1400 annualized), the company’s marketcap is $4.0B as of Friday, and net debt is somewhere in the neighborhood of $7.2B, give or take a hundred million. That gives them a current valuation before $300M synergies of about 8.0xEBITDA, and after synergies just 6.6. The market is definitely not giving the company much credit for those synergies at the moment, but declaring the company’s integration and prospects thereafter to be disappointing on the basis of one month’s performance for which we have zero data seems just a tad hasty. There’s definitely substantial upward mobility possible here for Level 3 by merely not screwing up, let alone materially increasing the growth rate later on. Having more decimal places is immaterial at the moment. Either you believe they can integrate the assets and are patient enough to wait, or you don’t and won’t. Enough said.
On the lack of Global Crossing Q3 pro forma numbers, I think the reason was obvious at the time. Global Crossing’s Q3 results were not enough to maintain the company’s full year guidance, and Level 3 doesn’t want to do all that pro forma homework just to explicitly own a miss. After all they don’t do quantitative guidance any more these days anyway specifically to avoid that sort of thing. Calling for heads to roll on the basis of the results of a company the management team wasn’t in control of at the time is a bit over the top. We’ll get the pro forma data eventually, and predicting Q4 is a crapshoot whether we had it or not — it’s just too complicated to reliably pin down.
On not forecasting a higher growth rate than the high single digits they have already talked of, when has Level 3 ever made such a call in October? Never. If there’s an update to such qualitative (and rather useless anyway) guidance, it will be in February, and anybody who thought otherwise was engaged in daydreaming. What they’re doing is getting a quarter’s integration out of the way with an intent to present the new company in all its (hopefully) glory in one lump. Would it really have been satisfying for Level 3 to promise the world in their Q3 call before actually being ready to deliver? Actually, I doubt they would have been believed, and the situation would be effectively the same but with higher goalposts.
I do understand the underlying frustration of course for long term holders of Level 3’s stock. It has been a long, long, long road, and the quite valid question of ‘Are we there yet?’ had better produce a positive response relatively soon. But for now, it will take time to play out.
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