Global Crossing Merger: Level 3 Needs to Avoid Past Mistakes

Level 3 Communications is making a concerted effort to avoid previous mistakes while integrating Global Crossing, financial analysts wrote Monday.

The communications carrier “is very focused on keeping its customers happy during the integration process and has several ‘early warning’ systems in place to track trouble ticket resolution and any provisioning issues,” D.A. Davidson & Co. analysts Donna Jaegers and Nick Yu wrote in a research note following Level 3’s first-quarter results last week.

From 2005 through 2007, Level 3 made eight different acquisitions, Yu told Channel Partners in an email. At the time, however, Level 3 was more interested in achieving synergies rather than focusing on the customer experience, the analyst said, leading to “provisioning issues, extended install times, customer frustration and eventual loss of revenues.”

“So this time around, management has emphasized on their earnings calls that they’ve learned their lesson and will be laser focused on the customer experience,” Yu said in the email.

Some analysts don’t have much faith in the Global Crossing merger at least as it relates to creating value for shareholders. Canaccord Genuity analysts, who recommend a “hold” on Level 3’s stock, have said the stock has underperformed in the wake of several acquisitions.

“We have no reason to expect the Global Crossing acquisition will be different,” analysts Greg Miller and Eric Chu wrote in a daily letter to investors May 4.

Level 3 closed its acquisition of Global Crossing in October 2011 in a deal that expanded Level 3’s worldwide network and brought its annual revenues to more than $6 billion based on the combined results of the companies.

The deal has enabled Level 3 to shift more business from low-margin wholesale sales to enterprise revenues, D.A. Davidson analysts wrote.  

“Enterprise sales typically have longer term, 2-3 year contracts with more rational pricing than the 15%-25% per year price declines in the wholesale market,” the analysts wrote.

The largest risk facing Level 3, the analysts wrote, is its more than $8 billion in debt, but they indicated the company has bought itself time to meet its obligations because significant debts aren’t due until 2018. Level 3 listed $8.5 billion in debt as of March 31, 2012. In an investor presentation, the company said $172 million is due next year and $1.4 billion matures in 2014.

Shares of Level 3 (LVLT) closed Monday at $25.33 on the New York Stock Exchange. The price is up significantly from the beginning of the year ($17.20 on Jan. 3, 2012).

D.A. Davidson analysts recommend a “buy” on Level 3 and have set a 12-to18-month price target of $30. Of the firms tracked by Zacks Investment Research, four recommend a “strong buy” while one recommends a “buy.” Another seven analyst firms recommend a “hold” on the stock.

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