Level 3 Communications (LVLT) completed the acquisition of Global Crossing on October 4, 2011, and announced plans to transfer the listing of its common stock to the New York Stock Exchange, which occurred today, October 20, 2011. In conjunction with listing on NYSE, the company affected a 1-for-15 reverse stock split of the Level 3 common stock.
The reverse stock split has been approved by shareholders since 2005. The proposal allowed four possible reverse stock split ratios: 1-for-5, 1-for-10, 1-for-15 and 1-for-20. The board chose 1-for-15.
The LVLT SEC filings indicated:
--The purpose of implementing a reverse stock split would be to attempt to increase the per share trading value of our common stock to one that is more typical of the share prices of other widely owned public companies. Our Board intends to effect the proposed reverse stock split only if the implementation of a reverse stock split is determined by the Board to be in the best interest of Level 3 and our stockholders.
--We believe that a number of institutional investors and investment funds are reluctant to invest, and in some cases may be prohibited from investing, in lower-priced stocks and that brokerage firms are reluctant to recommend lower-priced stocks to their clients. By effecting a reverse stock split, we may be able to raise our common stock price to a level where our common stock would be viewed more favorably by potential investors.
--Other investors may also be dissuaded from purchasing lower-priced stocks because the brokerage commissions, as a percentage of the total transaction, tend to be higher for such stocks. A higher stock price after a reverse stock split should reduce this concern.
--The combination of lower transaction costs and increased interest from institutional investors and investment funds could have the effect of improving the trading liquidity of our common stock.
Given current economic conditions, and that the board concluded at the May Annual Meeting that circumstances did not warrant the implementation of a reverse stock split, why now?
Many have been looking/hoping for positive news concerning guidance, given reverse splits tend to carry negative connotations, but what was known just a few months ago has not changed. Integration is in the initial phases, and LVLT’s history does not instill confidence, so we will have to wait and see if it hits any bumps in the road or has learned from past mistakes.
I think the decision to reverse-split has less to do with the reasons given in the SEC filings and much to do with the NYSE listing. According to the listing standards found here, all issuers must have a $4 stock price at the time of listing. I believe listing on the NYSE forced the reverse split, and the board decided on the 1:15 ratio to increase the per-share trading value of the common stock to one that is more typical of the share prices of other widely owned public companies, as noted above.
The reverse split will not be a catalyst for the stock price. The catalyst will come when and if management provides better visibility. The company will release third-quarter results on November 2, 2011, and investor expectations may be higher than normal now that the acquisition has closed and the reverse split was implemented.
LVLT and Global Crossing pro-forma numbers, including those based on the reverse split, can be found here.