Level 3: More M&A Targets Predicted

By Josh Long Comments
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Level 3 Communications Inc. is in a good position to get even larger through further consolidation, equity analysts said in a report April 1.

"LVLT has the highest firm value of the emerging carriers and a relatively high market capitalization," Oppenheimer & Co. Inc. analysts Timothy Horan and Ned Baramov wrote in the report. "These factors, combined with an uncanny ability to access credit markets, makes LVLT one of the most likely candidates to drive consolidation."

The equity analysts say logical, potential targets include Colt Group S.A., Inteliquent and XO Communications, as well as a so-called sale-and-lease-back pact with Sprint Nextel Corp. Another merger possibility: Cogent Communications Group Inc.

Colorado-based Level 3 is no stranger to acquisitions and has been busy lately continuing to integrate the operations of Global Crossing Limited, which it purchased last October.

That merger benefited both companies, according to Oppenheimer.

"We expect any further acquisitions by LVLT to have an equally positive impact. We believe the company will be in a position to announce something around year-end as the integration with GLBC will be largely behind it," the Oppenheimer analysts said.

Horan and Baramov also indicated Level 3 might have an appetite to swallow tw telecom Inc. because of its fiber network, although they cautioned that CenturyLink Inc. or other telcos are more likely to home in on tw telecom. They also indicated tw telecom isn't interested in mergers and acquisitions in the immediate term. The business-oriented telecom provider is on pace to achieve double-digit revenue growth next year, according to Oppenheimer.

"This in turn should drive multiple expansion," the analysts wrote, "and given management's focus on unique and innovative new services (e.g., fractional Ethernet and intelligent network services), we expect that it will be a few years (until the potential contributions of these new services are full realized) before the company considers M&A."

In the coming years, Level 3 may be the company acquiring rather than being acquired. But over the long term, it's possible CenturyLink will make a bid for Level 3, according to Oppenheimer. CenturyLink also has been busy with acquisitions in recent years having acquired Embarq Corp. in July 2009, Qwest Communications International Inc. in April 2011 and Savvis, Inc. in July 2011.

"In the long run, CTL and LVLT would control almost all the long-haul conduits and a huge percentage of the fiber assets in the U.S.," Horan and Baramov wrote. "This would give the companies enormous pricing power, in our opinion."
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