M&A Down Under for Level 3?

October 3rd, 2012 by · 19 Comments

While Level 3 Communications (NYSE:LVLT, news, filings) was mentioned by some as a suitor for TW Telecom (NASDAQ:TWTC, news, filings) recently, yesterday a different rumor emerged in another part of the world that may have more teeth. No not in Europe or South America, actually, which is where most of us have been looking. Commsday says that the global network operator is rumored to be contending to purchaseAustralia’s NextGen Networks from the giant contractor Leightons and add a fourth continent to its terrestrial network coverage.

This isn’t the first time an Australian fiber asset has been available, but it’s the first one that looks like a perfect fit for Level 3. NextGen has 19,000km of intercity fiber/conduit (built in 2002-3), metro rings in the major cities (from the acquisition of Silk in 2008), and data centers in each (if Leighton’s MetroNode assets are also in the mix).  It has little legacy baggage and long term potential in the right hands, and it looks a lot like an early version of what Level 3 has in South America and Europe.

With Australia’s NBN initiative now moving steadily along, the regulatory situation in Australia looks much more stable and favorable to outside ownership than in the past.  Level 3 has a half dozen nodes in the APAC region that it inherited from Global Crossing, but it has not owned real infrastructure there since selling off its Pacific cable systems to Reach as the bubble burst.

Since then, it has become clear that it is the terrestrial infrastructure that matters, you can’t survive economically with just subsea a few PoPs.  Thus Level 3 is not likely to return to APAC unless it is somewhere it can own what it likes to operate, and it’s not easy to get a foot in the door in Asia.  But Australia might work, and looks like an asset that might fit the bill.

Of course others are probably more likely to win the auction if they want it badly enough, as local network operators like iiNet, TPG, and even Pipe have more synergies available to them.  And we (or at least I) don’t know the underlying financials, so it’s very hard to tell whether such a purchase would fit within Level 3’s criteria right now, i.e. that it be accretive to cash flow and not raise their debt/ebitda ratio, or even what it would cost.

A few data points from recent Australian network M&A might help put things in perspective.  Earlier this year M2 bought Primus Australia for $200M.  And last year, iiNet bought TransACT for $60M and Internode for A$105M.  None of those are really at the same level of infrastructure as NextGen, but it’s still reasonably enlightening.

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Categories: Internet Backbones · Mergers and Acquisitions

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19 Comments So Far

  • CarlK says:

    It’s an exciting time to be living in a bandwidth hungry world! The possibilities remain endless, and Australia is a place where lessons can be learned in satisfying the consumer’s insatiable appetite for speed and quality of service everywhere.

    I see The Wrong Street crowd is trying to put fear mode into the Level 3 stock, yet again! It’s a dirty trick that won’t stop the Big (3) Train from going where no man has ever traveled before! Press the accelerator to the floor, and let your wild imagination loose!

    By the way, that smart ass, ENRON, who backs Cogent flies to be swatted on the wall here in the U.S., lost a coveted board seat to T. Michael Glen, FedX’s highly regarded key executive. LOL!

    • Anonymous says:

      Hmmm.. more “insight” from the L3 shill. The broader question is does he have his own cell in the 3000 building, or is her just playing the swings in stock from his basement and trying to avoid a margin call so he can keep making the payments. Either way, its bad for TR.

  • ABC says:

    Someone needs to just acquire this pos instead and end lvlt’s miserable existence.

  • Anonymous says:

    This map is misleading. Australia has more land KM2 than the 48 contiguous US states.


  • Justin says:

    I get a kick out of all the negativity around LVLT. Things of this scale just don’t happen over night. Thanks for the analysis as always Rob.

  • Anonymous says:


    ABC you know(or ignore) that this was a long debt workout story until 2011. Comparing that experience and those shareholders to what I think we can all agree is finally a REAL company makes you just look funny in a foolish, naive or evil way. Jokes on you pal.

    • ABC says:

      And how much have shareholders made since 2011 on this finally REAL company that you call it? But the joke is on me huh? If you say so.

      • toddforthree says:

        the stock closed 2010 at 14.70 and is now at 21.89. so the answer to abc’s question is 48.9%

        • ABC says:

          Nice cherry pick date. And that was before the acquisition when it wasn’t even a REAL company yet correct? How has it done since then?

        • Anonymous says:

          toddforthree, that’s really silly. you’re really going to take random dates and say LVLT is up???? What about year end Jan 2009 when stock was at 22.35? Or April, May, June, July, Aug, Sep, 2011 when stock ranged from 24-38?

          For over a decade LVLT has been a horrible stock for equity investors while its bonds have performed amazingly for creditors.

  • Anonymous says:

    If you concede the point that this was a debt workout why do you continue to reference periods where the equity layer was traded as an option?

    Todd’s “cherry picked” date was a reply to anon’s comment that L3 was only relevant to the creditors before that. You can’t haven’t both ways.

    Over the past decade economic value here has moved down the capital structure until the point last year when the bonds have all gone way over par, they have refi’d bond investors to death and has started to move into the equity layer.

    Is this debatable ABC or do you want to continue to cry that value hasn’t been building?

  • fluids_only says:


    You know that I struggle to see this as a good target for Level 3. Why?

    – Australia is a small market with very expensive international connectivity. Buying a domestic intercity network isn’t going to give them a good cost base for their global enterprise customers. As you rightly point out, synergies with PIPE/TPG and other sub cable owners would make more sense.

    – This is an intercity network, not so heavy on metro. Level 3’s strategy has been metro in recent years.

    – And isn’t Level 3 all about enterprise these days? Why focus on wholesale – which is all Nextgen is?

    – I don’t see the Australian NBN as necessarily creating favorable conditions for such an investment. For one thing, the Australian regulations prohibit an operator like NextGen from building new high speed fiber unless it offers its capacity for sale on the same terms as NBN does.

    I’m not sure where this rumour came from and stranger things happen, but it just doesn’t seem to ad up to me …

    • fluids_only says:

      Always a pleasure to read your take on things though 🙂

    • fluids_only says:

      To clarify my point about PIPE/TPG, I’m saying that NextGen would be a better target for them, not that Level 3 would be better off buying PIPE/TPG.

  • valmont says:

    its amazing how resistant to change opinions are.

    on a fundamental basis there are clear, obvious, improvements at LVLT (and across the whole industry for that matter). Yet some people cannot see it.

  • Anon says:

    Really? We’re saying the telecoms industry is in good shape and getting better?

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