Would Anyone Want to Buy Level 3?

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Given the wealth of connections and contacts of a large corporation in the telecommunications industry, such as at Level 3 Communications, it is always extraordinary that the valuation of a firm increases with speculation that the company is considering a buyout of itself. It would be more logical that it should decrease because a better assumption should be that a leak of such a strategic option is more likely to mean that potential purchasers are probably not knocking down the doors with offers. Nevertheless, in light of the news report that indicated that Verizon could not sell its enterprise assets (and thankfully so), at about the same price it unloaded just its FiOS territories in the three states outside of its incumbent territory, it may be reasonable to expect that a purchase of Level 3 would hardly be a walk in the park. The CLEC’s valuation is currently quite high compared with its forecasted earnings. Of course, such a narrative is never complete without the inclusion of Alphabet’s Google, despite its relatively limited investments in outside communications infrastructure in the past (including with fiber to the premises), seriously being considered as a potential suitor.

One problem for Level 3 not appearing to be an attractive acquisition candidate is that its long-term debt is approaching $11 billion. In fact, the most valuable player at the firm for many years has been its CFO, Sunit Patel, who is a master when it comes to debt refinancing instruments.

Another good point is found in 24/7 Wall St: “If a corporate insider is expecting his or her company to be acquired, even if they are involved in planned share sales, one might wonder if they would be a bit lighter on selling their stock if a buyout is imminent. Level 3 insiders have sold nearly 200,000 shares since the start of June — with no significant insider buying.”

A third possible concern is that at least at one time, Level 3 had as many as 30 vendors in its transport network as a result of its acquisitions. Although the company developed an internal operating system to deal with all of these types of equipment, in which in some cases, the vendors no longer existed, we wonder if the situation is still difficult enough to give the operations people of an acquirer pause.

With investment analysts in recent days increasingly taking out Comcast as a possible buyer of Level 3 anytime soon, we turn our attention to Google, the other candidate that has been most often mentioned as a purchaser. While the search engine giant has put money into submarine networks, it has always been as part of a consortium with other companies, never fully owned by itself. Also, in the past, there was the false assumption that just because Google bid on wireless spectrum, that it was truly interested in acquiring that capacity. As usual, when it comes to its interest in networking external to its company, it has been mainly about influencing the market to move faster to increase bandwidth for the Internet in general in order to facilitate further advertising revenue for itself.

It is not to say that there may also have been some nefarious motivations as well. On an April podcast, angel investor Chris Sacca, claims he “got to start a group [at Google] that is now called Access,…so, I got to be a rebel…backed by billions of dollars. I got to go to this FCC spectrum auction and play the biggest hand of poker that has ever been played. I got to bid the $4.7 billion price just to call [expletive] on Verizon.” A 2015 article in Forbes also mentions the “head-faking [of] a…bid…(a ploy that succeeded in driving up the price for carriers).”

The Forbes piece also mentions “the failed effort to bring free Wi-Fi to San Francisco.” Yet, again, it was not about Google really getting into the business, but to encourage others to do so.

Of course, another big reason for Google wanting to avoid Level 3 is that it already has its hands full with regulatory bodies, such as the European Union. For instance, it would not have to deal with the new proposed rates by the FCC for business data services.

[written by Mark Lutkowitz]