Level 3: Do the Exec Changes Foreshadow More Acquisitions?

In the continuing series of posts analyzing the executive shake-up at Level 3 Communications, it's time to take on another theory, this one from Andy Abramson, who speculated that the shake-up is somehow connected with a forthcoming acquisition of XO Communications or Global Crossing, to be followed by a Sprint acquisition.  Andy is usually good for this kind of thought-provoking insight, and I do enjoy having my thoughts provoked, but after thinking those thoughts, I think Andy is stretching a bit too far on this one.

In order to buy a company, Level 3 would need three things:

1. The currency to make the purchase.
2. The operating capacity to do the integration of the acquired company.
3. The desire to own the purchased assets and/or customers.

You could argue the point on number 3, that Level 3 may or may not want to buy XO or Global Crossing or Sprint.  That might be a topic for another post someday.  For now, let's just simplify the analysis and assume that Level 3 does want to buy one or more of these companies. 

The problem for Level 3 right now is in categories 1 and 2.  Starting with number 1, which is a great place to start, I don't think Level 3 has the gumption to buy anything but a small company right now.  The company's stock is at $1.95, near an all-time low, so the company would be reluctant to do an all-stock acquisition, because they would have to dilute themselves an awful lot to do it, and I really don't think they want any of the three companies mentioned badly enough to do that kind of dilution. 

In terms of using cash on an acquisition, the company had about $714M cash at the end of the year.  With the company forecasting negative cash flow for 2008, and with $25M in debt maturing this year and another $362M in debt maturing next year, I think the company wants to conserve most of that cash to fund operations and/or debt retirement, rather than spending cash on an acquisition.  Selling more equity to raise cash at current stock prices would be ugly, so that's out.  Raising more cash through a debt offering in today's debt market is not attractive, either.

On number 2, the company is still playing catch-up on the string of acquisitions it made for the past several years.  Like a contestant at a speed-eating contest, they were plowing through hot dogs until they got to the one labeled Broadwing, and they choked.  The Heimlich maneuver has included re-assigning leading executives to focus on the problem, and re-forecasting 2008 revenues, and now the departure of the President and COO.  That's a lot of indigestion, so I don't think the company is ready to start shoveling in more hot dogs right now. 

I could be wrong, and Jim Crowe could be out there actively shopping for more companies to buy, but I doubt it.  If he is trying to shop with investors' money, he is likely to hear the investors tell him to take his prior purchases out of the box and enjoy them for a while, first. 

So, from where I sit, it looks like Level 3 will be on an acquisition diet until the company does some more digestion of the prior acquisitions.  That diet will include steadily managing SG&A downward for this year, which is hard to do when you are adding to the acquisition integration workload.

Comments

[Jim G]

What do you think the chances are that, at these prices, Level 3 itself might be acquired? Not sure what is still in place in terms of poison pill, nor am I familiar with how much control Crowe, Scott and others still have in terms of % ownership of the company...