Level 3 and Global Crossing – the hurdles

Previously, I laid out the case for Level 3 purchasing Global Crossing from a strategic standpoint, which I think is quite compelling.  However, it takes more than a good fit to make a merger possible, let alone likely.  So let’s look at the hurdles such a deal faces.

Level 3’s readiness

Anyone who follows telecom knows that Level 3’s past 12 months have been, shall we say, challenging.  In the process of integrating the 7 acquisitions they made in 2005-2006 they managed to hamstring their ability to provision many services, which has effectively precluded them from making another M&A move.  The question therefore, is when will they be ready again?  Well, it *looks* like the answer is this winter when their new Unity systems are largely in place.  Given that a GLBC deal would not close until then even if they announced it today (due to the many countries and regulatory bodies that sould need to sign off on it), it would seem that they could act now if they wanted to as long as there aren’t any more shoes about to drop.

Customer Focus Issues

Even if they are now ready, there are some parts of a LVLT/GLBC combination that would need some thought.  First amongst those is GLBC’s focus on large multinational enterprises with managed services, a customer base that Level 3 does not really serve.  While traditionally a wholesale shop they bought an enterprise customer base from Broadwing, Telcove, and ICG and have been working hard this year to put the pieces together properly, but it focuses on the mid-size enterprise with unmanaged services which is somewhat different.  However, I think that is mainly because it is what was already there more than anything else, Global Crossing’s multinational biz would fill another gap in their offerings if it could be integrated into the whole in a reasonable way.

Financial firepower

If they are both ready and willing operationally, the final hurdle is of course money because it would require about $2B to take out Global Crossing.  The debt markets are not too healthy right now, which means that money is expensive.  Since Level 3 does have some refinancing to take care of in 2009 and in 2010, it would seem prudent to save what access they have to the debt markets for that.  So we would have to talk about a stock deal, at least in part.  A few weeks ago when Level 3’s stock price was near $4, it might have been pretty reasonable to use it as currency.  Today’s close of $2.62 makes it less likely, but reasonable earnings results in a few weeks would go a long way to restoring credibility and raise the stock price.  Otherwise, it is probably a deal breaker.

All in all, while 6 months ago the operational issues took all M&A off the table, I think the biggest hurdle now is purely financial.  If debt is expensive and the stock price is too low to use effectively as currency then it can’t happen, despite the strategic fit.

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Categories: Internet Backbones · Mergers and Acquisitions