In a recent article, I discussed the announced acquisition of Global Crossing (GLBC) by Level 3 Communications (LVLT). The definitive agreement outlined what was reported as a tax-free, stock-for-stock transaction.
Not only did this news catch me by surprise, but it forced me to pause and question what year I was in. Two prominent telecom-networking companies are 'hooking up'. Deals of this sort were commonplace at the onset of the dot com explosion of the mid-to-late 90s and early 2000s, when the need for high speed fiber networks placed high premiums on the companies that provided them. At the time, I talked about my expectations for the company. Now that Level 3 just reported its Q1 earnings, let’s look at what the numbers were and set some expectations for the quarters ahead.
First, upon closing of the Global Crossing deal, I sensed that the combination of the two companies would likely improve its balance sheet, cash flow, credit profile as well as other benefits of integration and consolidation. According to Sunit Patel, Level 3’s CFO, the transaction would accelerate the achievement of Level 3’s target leverage ratio of 3 to 5 times debt to Adjusted EBITDA.” He was quoted as saying,
“We expect the transaction to be accretive to Level 3’s Free Cash Flow per share in 2013 and to give us the financial strength to capitalize on the many opportunities available in the global market.”
Clearly there are a lot of financial implications and expectations on this deal. Let’s see how the company's recent report measured up.
Revenue came in $929 Million compared to $910 Million, or up 2% year over year. The company reported a loss of $0.12 cents per share versus a loss of $0.14 cents a year ago. Free cash flow was pretty disappointing at a loss of $115 million. This stood out a bit more since the loss was narrower the year before at 'only' $90 million.
Metric | Q1 2011 | Q1 2010 | YOY |
Revenue | $929 million | $910 million | 2% |
Earnings per share | -$0.12 | -$0.14 | 14% |
Free Cash Flow | -$115 million | -$90 million | -28% |
Cash Equivalents | $1.1 billion | $0.6 billion | 83% |
Long-term Debt | $7.1 billion | $6.4 billion | 11% |
Jim Crowe, CEO of Level 3, called the report “solid”. That description left me scratching my head quite a bit. I remain optimistic about the prospects of synergistic opportunities with Global Crossing, but after hearing this call I was left to wonder how the company was going to generate sales at a decent rate. Looking at these figures above, I find it hard to find any positives. The long-term debt figure stood out like a sore thumb and really served to curb my enthusiasm about the long term outlook.
Prior to the deal, many experts who studied Level 3’s business and books were firm believers that the company needed Global Crossing’s acquisition or some means of leveraging its debt to present more balance. It is now quite evident that Level 3 has pretty much extended its resources and has done as much as it possibly can with not only its current assets, but also how it is structured. Though the company has made some improvements and realized some incremental growth, margins (in my opinion) remain putrid.
How Global Crossing Will Help
At current valuations and with future cloud demand, one has to imagine that a market exists for the services that Level 3 offers. With Global Crossing on board, the combined companies will be able to operate a unique global services platform anchored by fiber optic networks on three continents, connected by extensive undersea facilities. The combined network will be able to serve a worldwide customer set with owned networks in more than 50 countries and connections to more than 70 countries. It will then be able to potentially create a company with pro forma combined 2010 revenues of $6.26 billion and pro forma combined 2010 adjusted EBITDA of $1.27 billion before synergies and $1.57 billion after expected synergies.
On the bullish side, upon the completion of the acquisition, not only will it allow Level 3 to lower costs by the combined operations, it will also help increase its average profit edge by adding to its portfolio of enterprise services with higher margins.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
