PAETEC Holding Corp. is well into its merger agreement with Windstream Corp., but a financial analyst last week raised a question that makes PAETEC’s future seem less certain. Would Level 3 Communications, fresh off its acquisition of Global Crossing, submit an unsolicited bid that PAETEC’s board of directors would have to consider?
In a research note Oct. 6, FBR Capital Markets & Co. analyst David Dixon said Level 3 would be justified to offer a higher bid than Windstream.
“While the WIN/PAET deal makes sense from a defensive perspective and offers some synergies, an LVLT/PAET deal makes greater strategic sense from a scale perspective and we believe creates more upside for both LVLT and PAET shareholders due to even higher synergies from their overlapping network coverage and operations," the analyst wrote.
Spokesmen for Level 3 and PAETEC declined to comment on the report.
PAETEC’s shareholders are scheduled to vote on the Windstream merger on Oct. 27 in New York. But PAETEC revealed in its proxy statement/prospectus that it “may terminate the merger agreement if PAETEC has received a proposal that its board of directors determines in good faith to be superior to the merger and certain other conditions are met, including PAETEC’s provision to Windstream of notice of such a proposal and an opportunity to revise the terms of the merger agreement."
PAETEC, whose stock price has climbed since the Windstream merger was announced Aug. 1, would have to pay Windstream a $40 million termination fee.
“Hostile takeovers are rare, and there is much market uncertainty but at current valuation, LVLT could present a topping bid to the board of $7.30 per share and should be able to retain 50% of synergy upside," Dixon wrote.
PAETEC Shares Up
On Aug. 1, Windstream revealed an agreement to acquire Fairport, N.Y.-based PAETEC in a deal valued at $2.3 billion. Windstream said it expected to issue 73 million shares of stock valued at $891 million and assume or refinance debt of $1.4 billion at the time of closing. PAETEC shareholders will receive .460 shares of Windstream common stock for each PAETEC share. That represents a roughly $5.93 value for each share of PAETEC common stock based on the closing price of Windstream ‘s common stock on Sept. 16, according to Chairman and CEO Arunas Chesonis, in a letter last month to shareholders.
