Is the Tide About to Turn For Level 3 At Long Last?

July 9th, 2012 by · 17 Comments

Last week marked nine months since Level 3 Communications (NYSE:LVLT, news, filings) closed its purchase of Global Crossing, and this week will be fifteen months since the deal itself was announced. The company’s stock price today is still below where it was on both of those dates, but the underlying fundamentals seem poised to shift dramatically in their favor over the next quarter or two.

The company offered EBITDA guidance of 20-25% growth above a $1.216B base, or $1.45-1.52B. In order to merely reach the lower end of that range they’ll need to be at $400M in quarterly EBITDA by year’s end. For example, a linear progression that would get there would start with Q1’s $327M, then $352, $377, $402 over the next three quarters, or $1.458B for the year. Personally, I think Q2 comes in a bit lighter than that with a bigger ramp needed in the second half (as always), but the overall trend goes in the same direction unless you assume an integration disaster scenario from the beginning.

Big deal, right? Well, at their current enterprise value, that $400M annualized EBITDA run rate at year’s end would correspond to an EV/EBITDA multiple of just 7.3 with more synergies still in the wings. That’s down where it was during the credit deep freeze. To keep their EV/EBITDA ratio where it is now, the stock price would have to pass $35.  At that point models start predicting actual positive earnings per share a quarter or two later, with big free cash flow numbers for 2013.

Which way things go may hinge on Level 3’s Q2 earnings report in a few weeks. Investors merely hope to see a continued growth trend accelerating in to the second half along with steady integration progress. Shorts are just waiting to pounce on any news of integration troubles.

Remember the 9 month mark was when the integration of Broadwing (and six other companies) reared its ugly head. But there are more eyes on their progress this time. While I have heard word of a couple minor hiccups, by and large the integration seems to have been a quiet one thus far. If they pull through in Q2, then the integration looks downhill from here and the improvement in the fundamentals quickly becomes unignorable.

It’s been a decade since Level 3 turned from an overoptimistic builder into a desperate consolidator looking to stay afloat amidst the ruin of all its neighbors. But now the tide looks like it just might be ready to shift back the other way at last, with consolidation complete and organic buildouts making sense again for other fiber operators already.

As long as they don’t stub another toe.  The cautious way Crowe, Storey, and Patel have been working this integration, that toe seems much better protected this time.

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Categories: Financials · Internet Backbones

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17 Comments So Far

  • B says:

    I sincerely hope things have finally turned their way and maybe many long term shareholders finally get some reprieve. I am still baffled and in my opinion consider the compensation Lilt execs have been awarded over the years borderline criminal. Crazy concept…I actually believe people should get paid huge sums for doing a good job.

    I agree that the 2nd qtr results and CC will show a lot and if they have turned the corner. Only took about 15 years…

  • Al B says:

    Everything reads wonderfully but it all reads so familiar:

    would you please explain in layman terms your meaning of:
    “The cautious way Crowe, Storey, and Patel have been working this integration…”

    it surely does not appear that there are any changes and are we to overlook the continuing stock gifts, airplanes and bonuses etc with which LVLT flourished during the past 14/15 years as there certainly is no evidence of an lessening of these at the current time & environment – Thanx

    • Anonymous says:

      OUCH!!!! That’s gotta sting a bit. Nothing like making data centers one of the major cornerstones of your growth strategy/story, only to have a customer affecting power outage at a major one. Nice job LVLT

  • Anon5KG says:

    Maybe they forgot to pay their electrical bill due to their multi billion dollar debt

  • Anonymous says:

    What’s funny is people are interested in its debt now given it is as low as it has ever been as a multiple of their ebitda, slated to be 4.4x(w/in their 3-5x target) by a bearish UBS analyst yesterday. Plus they are now(according to the same UBS analyst for his 2013 #s) going to be fcf AND eps positive.

    I’ll grant you that the proof is in the pudding and the first have to put the numbers up but given the way the debt is trading it seems like the creditors are as relaxed with L3 as they have ever been. Is this an all time low in L3 borrowing costs, does anyone know if it has ever been lower?

    • anonymiss says:

      not sure what you’re talking about, people on this board have been obsessed with their debt forever. Go back and read any of the countless comments posted about LVLT over the years.

      Shareholders certainly hope you’re right about your assessment (or should I say UBS’). I’ll pass on the sell-side analyst’s recommendations of LVLT until one them actually vigorously challenges Crowe, Storey, or Patel on anything. The earnings calls are like a mutual lovefest where analysts fearful of lost access to executives ask meaningless questions to executives who spoon out Earnings Call 101 responses.

  • CarlK says:

    As Crowe rapidly approaches Walter Scott’s own holdings and corresponding “percentage stake” borne on the backs of a shareholder printing press without any shame for rewarding jobs poorly done on the “equity front” leading up until today, WTH good is this outrageous and outlandish “stock dilution” if such DEBT GONE WILD is INSURMOUNTABLE?

    “It might as well be us,” I mean ME because I am a greedy corporate bastard. James Q. Crowe

  • Anonymous says:

    Even if they miss, they just look for another acquisition to meet revenue guidance and throw a squirrel past the investors yet again. Sunit will continue to stay up late, flipping through the pages of Bernie’s personal copy of the Worldcom finance play book.

  • Anonymous says:

    Amazing how the shorts come out in the 2 weeks before the quarter trying to pollute the industry conversation here with comments that should be reserved in arguments with their dogs or on yahoo message boards.

    Like the debt guy from earlier trying to play down the bond market’s all time high appreciation for Level 3 as a credit or this stooge comparing L3 to Worldcom – you have to laugh.

  • Parkite says:

    @Anon – The only ones laughing the last 10 years are insiders. This has been a horribly performing investment for outside shareholders. Zayo will have a larger EV than Level3 in 5 years.

    • CarlK says:

      Parkite, although I abhor the insider looting under false smoke signal disguises of unlimited growth around the corner while they raided the cookie jar for easy stock tied to horrendous under performance, I will warn Dan Caruso’s crew that their “enterprise value” would be dismissed as well as crushed consistently with Level 3’s, assuming that Little Piggie ever had the HUEVOS to come to market!

      Be grateful he is in “incubator” mode versus being exposed and exploited by those bunch of Wall Street Hyenas.

  • CarlK says:

    Or the constant chatter by “media outlets” they control talking about nothing except to put the Level 3 name in with more notable “TITANS” via headlines in order to invoke fear, uncertainty and doubt.

    OTOH, Crowe and his executive misfits have aided and abetted their cause by tucking their “loss report” after the option expiration in July when certain put buyer(s) were staking their bearish claims. According to the Open Interest, however, this trading god featured in earlier articles is a chump with less than 300K shares(July month), assuming they’re all bearish with buy side impetus only.

    Shouldering this heavy burden only remains a fact for retail equity owners having been continuously diluted over a fifteen year period still counting. To some extent, others shouldering the Level 3 burden may be the rank and file hard working employees who were/are not privileged enough to be sitting around the executive suites scoffing up outlandish sums of free stock like pigs at the trough.

  • Carlk says:

    As a matter of fact, Parkite, I would recommend that Dan, etal, especially the VENTURE CAPITALISTS backing him, don’t even think about REARING their HEADS inside the PUBLIC MARKETS at least until his mentor, James Q. Crowe, is finished tearing down the walls of THE MONOPOLISTS at their GATES! That might take more than five years still!

  • Carlk says:

    How did this smooth criminal get his filthy paws around so many shares? I am afraid he has “unlimited” lending capacity beyond this “long stake” for the shorts by controlling the back offices of WRONG STREET where atheist men like Enron corroborate to do much harm! I am afraid if he is not stopped in his tracks, he may be the source for enacting the rights offering in order to preserve and protect the valuable NOL’s which make our EBITDA significantly more “VALUABLE” than the rest of the Hyenas following us as part of the herd inside the communications space.

    Be careful what you wish for, Dan, etal. You must wait for Jim Crowe to finish his work before suiting up and coming onto the playing field with your five billion dollar EV.

    O’Mason, Prem along with The Singaporeans better have a plan to knock this SOB out quickly. IMO

    SAC CAPITAL ADVISORS LP03/31/2012 2,852,7502,650,9061,313.3457,084

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