Level 3 Wins Cable Lifeline

Aug.13.12 | About: Level 3 (LVLT)

For companies in the competitive Internet core, one of the toughest tricks is to win a long-term customer for more than pure movement of data.

So the multi-year agreement between Level 3 (NYSE:LVLT) and Time Warner Cable (TWC) is important for the former. The relationship marks a sharp contrast to the company's relationship with Comcast (NASDAQ:CMCSA), which has been pressuring the firm ever since it agreed to build out the content delivery network used by Netflix (NASDAQ:NFLX). This deal may lessen the pressure LVLT feels from the cable industry.

Announcement of the deal caused a significant pop in LVLT on Friday, and it's now approaching levels last seen in early spring. Its all-time high in its present form is just over $27/share.

Level 3 has had a long and sometimes troubled financial history. After going public in 1998 it became a classic dot-bomb stock early in the decade, before essentially being re-born in 2011 through a merger with Global Crossing, with which it did a reverse stock split and move to the NYSE. So while the Level 3 name has a long history on Wall Street, the current public company is only about two years old.

What investors should know about all this is that Level 3 has long had to do some fancy stepping to stay out of the way of phone and cable operators, and that it has survived.

For Time Warner LVLT will build on a content delivery network, originally acquired from Savvis (now part of CenturyLink (NYSE:CTL)), aimed at mirroring content in many different locations and reducing transmission costs. The deal announced Friday also includes an updated peering arrangement.

For investors, the Time Warner deal gives LVLT some visibility and could lead to stable profits, which would be welcome. The company only achieved a positive operating margin in its last quarter and is now close to break-even.

Success will be defined by its ability to cut a sky-high debt load with liabilities now two-thirds the level of assets. The managers have a reputation for getting out of major financial trouble and this latest deal is an indication they still have that ability.

Regular readers of my notes here at Seeking Alpha will note my regular contention that carriers have a very tough time getting any positive return on invested capital, and the history of LVLT demonstrates the point.

Now if they can only start delivering a profit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.