Seeking Alpha
Profile| Send Message|
( followers)  

Last year when I first considered investing in Level 3 Communications (NYSE:LVLT), I couldn't help but notice how the $2.3 billion company was in a shambles and was poorly run. I was mystified by the depths to which the company had fallen; after being a Wall Street darling trading in the high $130s, it was then relegated to penny stock status. But then I opened its books and discovered -18% margins that contributed to a string of sequential losses and I got the answers I was looking for.

What a difference a year makes. One year ago today, I was left wondering if there truly was a future for Level 3. These days I am making comments suggesting that Level 3 longs should invest in some eyewear to deflect the brightness that the future now holds for the network giant. Take a look at the company’s six-month chart:

[Click to enlarge]

LVLT-6month.PNGIf ever one is glancing at a chart and it inspires mountain climbing instead of skiing down the Alps, then that stock is doing pretty well. But to say that Level 3’s stock has been doing “pretty well” would be the understatement of understatements. In fact, I’m not sure that there is a hotter equity out there at the moment, and there are no signs of letting up.

Since reaching an intra-day low of $1.94 on June 20, the stock has now reached a new high of $2.67 (as of this writing) for an impressive 37% gain in a span of two weeks. It seems Level 3 seeks to set new highs every third trading session, as good news after good news continues to fuel the surge. I am now realizing how conservative my $3.00 target has been, as the stock now sits only a modest 12% away from my goal.

In remarkable fashion, the company is slowly and meticulously addressing investor concerns, particularly surrounding its debt. This was very evident in the news released yesterday, where the company signed an agreement relating to the conversion of $127,962,000 of 15% convertible senior notes due 2013. Details of the news are as follows:

  • Pursuant to a conversion agreement, Fairfax Financial Holdings Limited and certain of its affiliates and certain other investors have agreed to convert a total of $127,962,000 in aggregate principal amount of Level 3's 15% Convertible Senior Notes due 2013. Upon conversion, Level 3 will issue an aggregate of approximately 71 million shares of Level 3's common stock, representing the approximately 555.5556 shares per $1,000 note into which the notes are currently convertible. Level 3 will also pay an aggregate of $28,791,450 in cash, equivalent to $225 per$1,000 note, representing interest that would be due from conversion through maturity date. The shares of common stock to be issued under this agreement are exempt from registration pursuant to Section 3(a)(9) under the Securities Exchange Act of 1933, as amended.
  • Following this conversion of notes, $272,038,000 aggregate principal amount of the 15% Convertible Senior Notes due 2013 will remain outstanding. The 15% Convertible Senior Notes due 2013 are not callable prior to maturity in June 2013.

Level 3’s debt has always been a concern. But clearly management is demonstrating that it has a plan in place to manage the debt and is committed towards cleaning the company’s books. In addition to the news above, what continues to make this a true turnaround story is knowing that the best is yet to come. Investors should continue to be intrigued and be filled with an increased level of optimism that comes with the synergies that it will have with Global Crossing (GLBC) as joint entities.

In a previous article I wrote about how the joint companies made Level 3 more valuable or even undervalued. I pointed to how the deal would create a company with a unique capability to meet local, national and global customer requirements in a wide range of markets. By combining the strengths of each company, the new entity will offer enterprise, government, wholesale, content and web-based customers a comprehensive portfolio of end-to-end data, video and voice solutions.

Upon the announcement above regarding the convertible debt, Level 3’s chief financial officer Sunit Patel was quoted as saying: "This transaction is positive for our company as it helps us deliver.” Perhaps I was wrong in my comment above. Instead, I think Patel’s description of the deal should be considered the understatement of understatements. With the stock only 12% away from my target, I’m wondering if it is now time to revise upward?

Source: Level 3 Communications Continues to March Towards $3.00