With the new M&A buzz being the possible JV between Level 3 Communications (NYSE:LVLT, news, filings) and Sprint Nextel (NYSE:S, news, filings), there will come a whole lot of articles which spread the rumor but don’t delve into the nitty gritty. In fact, some will surely compare apples to oranges, and not realize it. Therefore, I thought it might be useful to take both companies’ operational performance and put them side by side in as close to an apples to apples comparison we can manage. It cannot be perfect of course, but we can get pretty close just by following the following guidelines:
- Sprint’s Voice revenues and Level 3’s wholesale voice revenues are mostly equivalent, so let them go head to head.
- Combine Sprint’s Data and Internet and Other revenues and compare against the combination of Level 3’s Core Network Services and Other revenues.
- Include stock compensation in Level 3’s numbers, because Sprint does not break it out for us at the segment level. This makes EBITDA comparable.
- Use EBITDA margin, not gross margin. Sprint uses a fully burdened gross margin, while Level 3 does not.
After following these rules, our comparison for Q1/2009 looks like this:
| For Q1/2009 |
Sprint Wireline |
Level 3 |
Notes |
| Voice | 660 | 170 | |
| Data/Internet | 805 | 791 | |
| Total Revenues | 1465 | 961 | |
| — | |||
| Operating Expenses | 1179 | 729 | Not including D&A |
| EBITDA | 286 | 235 | Includes stock compensation |
| EBITDA Margin | 19.5% | 24.4% | |
| — | |||
| Capital Expenditures | 77 | 78 |
I found this table quite surprising. If you were to scale Sprint’s large voice business and the low ebitda margins it likely has to those of Level 3, the two companies look amazingly similar. Almost like twins! On paper, one might simply write the equation:
Sprint Wireline = Level 3 + $500M/quarter of low margin voice revenue
But of course, there are other factors which shift the equation back in Level 3’s direction. First, the age of the underlying assets is wildly different. With no revenue on them, Level 3’s fiber assets are worth much more than Sprint’s. Second, in the Data/Internet category, Level 3 has far less ‘legacy’ revenue ($62M quarterly) than Sprint does ($228M quarterly – both Data and other).
If Sprint Wireline were for sale, what would it be worth in today’s market? Annualizing the above and putting an EBITDA multiple of 5-6 on it (see here for why this multiple is appropritate) would yield an enterprise value of range of $5.8-6.8B. Obviously that doesn’t include any net cash or debt, since Sprint Wireline doesn’t stand alone and we don’t have that number. But it does give us a general idea what it’s worth, and that in turn may help us figure out how particular JV arrangements might or might not work.
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Categories: Financials · Internet Backbones · Mergers and Acquisitions
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Your efforts along these lines are really appreciated.
A-1….believe it will happen,then roll-up begins. Thanks much.
Well done Rob. I enjoy reading your blog. Any idea how Sprint’s wireline compares to Level(3) in gaining new business? Churn? Current customers increasing services? Client satisfaction? Ability to grow? Also what would Sprint and Qwest, for that matter, concentrate on if zero deals were done?
I’ll see what I can dig up for future posts.
Why do I see $830M quarterly low margin voice revenues?
It was $824M last year in Q1/2008, perhaps you are looking there? In the Sprint 10-Q on page 26 it is clearly listed as $660 for the wireline segment:
Actually though, that’s a point worth adding to the list, Sprint’s LD voice business is shrinking, LVLT’s is not. Yet anyway.
29% of that is sold to its own wireless segment as well.
My apologies. I was combining both entities according to their Q1 voice revenue as you outlined in the table. Yes, I remember S including “sales to itself” in their numbers. Of course, that wireless entity will still need some provider to offer them services, so that they are valid revenues for any potential combinations or relationships. Great job, Rob!
Great Analysis Rob. Maybe this is too historical of a question but…why do you think Sprint devalued their own fiber backbone assets by focusing on wireless after the Nextel merger to begin with? What did they gain by willfully giving up on their #3 status as an IXC rather than leveraging that status?
I’d love to know your take.
GOOG is the key to this proposed VZ/LVLT venture. GOOG has both the billions to make it work and the need to bypass VZ/ATT monopoly that can restrain GOOG future growth/profits. With an alternative fiber optic route, with backhaul potential for all wireless, and with CLWR wirless veture biting at the heals, GOOG has most to gain in a S/LVLT venture or merger.
If Sprint were to take more than 40% control, and I may be mistaken here, I believe it would threaten the Level 3 Deferred Tax Asset. I would much rather see a commercial deal here if Sprint gets more than 40% the combined entity given how starved the Sprint business has been, the Sprint separation entanglements, the NOL risk, and broader integration risk.
For Sprint to use Level 3’s leverage as a bargaining chip with it approaching 5x ebitda, when other utilities have traded in times passed, and the growth set to resume in the economic sense and in the sector – I think Sprint is overplaying their hand.
If they can strike a deal it is a great idea.
Long haul is nothing but a price squeeze platform. Little value-add, declining margins and just a basic regional/national/oceanic transport mechanism.
Value is created in the local metro access market which Level 3 is now keenly aware of.
Great stuff Rob. Do we know how S and LVLT explicitly define “legacy” revenue?
They don’t explicitly define them that way, I’m the one that did that. Sprint’s ‘Other’ revenues are primarily non-core CPE stuff, and its ‘Data’ revenues are mostly ATM, Frame Relay, and older managed network services. I lump those as ‘legacy’ for now. For Level 3, it’s just the ‘Other’ category, which includes managed modem and the old SBC contract revenue as well as bits and pieces of managed network services from the genuity days.
Sprint’s LH biz is only 17% of revenue with thin margins … good deal if they can pull it off and control the JV
if you tie two boat anchors together, do they float ?
No, but if you melt enough of them down you might be able to make a battleship… 🙂
Is this term anchor being used to indicate something strong, sturdy and stabilizing, possibly creating an important landing zone versus an albatross dropped to some depth of the ocean? It’s 5:45 P.M. EST. 🙂
Nice post Rob… and great string of comments!!!
I am not sure if Level 3’s 8K which indicates that commercial deal has been signed is in fact with Sprint. I would doubt it given the confidentiality agreement was signed which I do not think Sprint would require given it is getting as many investor questions as Level 3. Seems like a Google clause.
If this line of reasoning follows, it would almost make the Sprint deal more likely given the peculiar timing. Why strike this deal unless you were trying to gain the upper hand in negotiations with Sprint?
Furthermore if $140M is the minimum revenue and they did not call it out as the biggest contract ever, does that mean that the Spanish contract in March was actually bigger??
Today’s consent solicitation filing by L(3) may be another part of the mosaic that a deal is around the corner.