Level 3 Communications (NYSE:LVLT) is a global communications provider headquartered in Broomfield, Colorado, that provides communications services to enterprise, government and carrier customers in more than 60 countries around the world. Level 3 operates one of the world’s largest Internet backbones.
LVLT and tw telecom (NASDAQ:TWTC) stockholders approved the acquisition of TWTC by LVLT on October 28, 2014. LVLT will report third quarter 2014 results on Wednesday, Nov 5, 2014 and plans to discuss third quarter results for both Level 3 and tw telecom.
This article is an in-depth look at Level 3 Communications for those not yet familiar with the company. Topics include:
- Management Change
- TWTC Acquisition
- Financials (Pro-Forma)
- Growth outlook (Pro-Forma)
- Valuation (Pro-Forma)
- Debt (Pro-Forma)
- Open tax issues
- Final thoughts
LVLT ran into major problems integrating past acquisitions resulting in the resignation of the then, president, COO and co-founder. Jeff Storey was brought in as president and COO as the company was experiencing the following:
- An increase in the time it took to activate service for customers, hurting revenue growth
- The company was taking longer to resolve customer network service issues
- The company didn’t have adequate provisioning capability to convert orders to revenue
- The company lacked adequate internal controls
Growth stalled but the problems were resolved avoiding what would have been a disaster for the company.
Doubts still remained concerning Level 3’s ability to turn the ship around under the current CEO. In April, 2013 LVLT issued a statement concerning a leadership transition…
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Added a market sentiment poll to the IIEX website. Feel free to vote on a monthly basis or if you change your sentiment. The webpage is at:
The more votes the better so feel free to pass this link on to others. It would be interesting to see the bull bear ratio of the community (if enough people participate).
On June 16, 2014 Level 3 Communications (LVLT) and tw telecom (TWTC) announced Level 3 will acquire tw telecom in a stock-and-cash transaction which we examined in our last article. We projected pro-forma results over the next five years. Those who follow these articles know I publish detailed historical and projected financials reflected in this and past articles available (in pdf format) here and an interactive model allowing readers to input their own assumptions to generate a detailed financial summary and income statement and fair value here.
Those who follow the company know Level 3 does not make public long-term forecasts as to future performance or other prospective financial information beyond the current fiscal year leaving it up to analysts and investors the task of determining if there is long term value to be had. This article is not going to get into Business segments, financial trends based on historical trends, risks etc. Why? Because all this was discussed in the last two articles which can be found here and here.
This is an update to compare the research published in past articles (and data on the IIEX website) to data from the S-4 filed with the SEC. This filing provides selected longer term financials prepared by Level 3 and tw Telecom as part of the due diligence in connection with the merger. This filing provides a check to existing research which has been based on the historical trends of the new focus (Enterprise) by new Level 3 leadership.
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- Both firms have the same focus; enterprise customers.
- Small network overlap bodes well for increasing existing customer sales in addition to new customer sales.
- Free cash flow per share is accretive after 2015; total free cash flow dollars increase substantially.
On June 16, 2014 Level 3 Communications (LVLT) and tw telecom (TWTC) announced Level 3 will acquire tw telecom in a stock-and-cash transaction valued at $41.92 per share at the time of this writing. Under the terms of the agreement tw telecom stockholders will receive $10 cash and 0.7 shares of Level 3 common stock for each share of tw telecom common stock at closing. The deal is expected to close in the fourth quarter.
Is this a good deal for the Level 3 shareholder? The deal must be accretive to FCF (free cash flow). The announcement noted the transaction is expected to be accretive to Free Cash Flow per share after the first year following transaction close but the magnitude of the gains are not defined. This article attempts to define these gains. We’ll also highlight EPS and EBITDA effects but the focus is FCF.
WHY A COMBINATION MAKES SENSE:
We’ve discussed in past articles that when Level 3 made a leadership change they also shifted their focus on Enterprise customers. Level 3’s growth driver is Enterprise and has been gaining traction over the last year as shown below:
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