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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