Level 3's In Genuity

Level 3 Communications Inc. (Nasdaq: LVLT) last week took another step toward completing its acquisition of Genuity Inc. (Nasdaq: GENU) after Genuity’s board gave it the green light (see Level 3 and Genuity Set a Date).

On Friday, Genuity's board said it had "no other acceptable offers" and that Level 3 had won the bid. So, that leaves one big question: If nobody else wants it badly enough, is it worth buying?

At a time when the telecom industry is still reeling from an economic meltdown, encompassing a glut in capacity and dwindling customer demand, the planned acquisition is raising some eyebrows. There's little doubt that a Genuity takeover fits well with Level 3’s strategy, but some industry observers question whether the strategy itself is very wise.

“They’re still concentrating on a carriers' carrier model,” says Network Conceptions LLC analyst Phil Jacobson, pointing out that in today’s market, carriers provide very uncertain sources of revenue. “This is still a very risky model.”

The market doesn’t appear to be too enthused about the upcoming acquisition either. Level 3’s stock price has not risen significantly since it announced its acquisition plans in November, and following the news Friday, the carrier’s stock price fell. In today's midday trading, Level 3 was off $0.03 (-0.58%) at $5.17.

The lack of interest in Level 3 shares following the news could mean one of two things, according to Jacobson: “If the market doesn’t give a pop to Level 3’s stock price, there’s something wrong with the strategy or the financials, as viewed by Wall Street...”

The main concern is the same problem that's hit the entire industry and forced a raft of restructurings... debt. Level 3 has about $6.4 billion in debt, according to filings from its third fiscal quarter, ended September 30 last year (see Level 3 Reports Q3).

Not everyone is pessimistic, though. Craig Johnson, an independent analyst based in Portland, Ore., points out that the misfortunes facing many companies in this space today have opened up acquisition opportunities at pennies on the dollar. Level 3, for instance, has agreed to pay a mere $242 million for Genuity, which two years ago had a market value of about $5 billion.

Genuity, which defaulted on its $2 billion debt load last July after its former parent company Verizon Communications Inc. (NYSE: VZ) refused to bail it out, filed for Chapter 11 bankruptcy protection in November (see Genuity Gasps for Breath). Simultaneously, the company, which provides data transmission, Web hosting, and Internet and security services, announced that it had agreed to sell its assets and operations to Level 3 (see Level 3 to Acquire Genuity Assets). Before it could cash in on the deal, however, Genuity had to schedule an auction that would allow other qualified bidders to make their offers for its assets. With that part of the game out of the way, Level 3 is likely to soon get hold of Genuity’s assets and, more importantly, the company’s customer base, which includes big-wigs like Verizon and America Online Inc.

Level 3 CEO James Crowe emphasized the benefits of being a buyer in a down market when he laid out the company’s new acquisition strategy last summer (see Buffett Boosts Level 3).

In a press release, he averred that "the ongoing shakeout is creating extraordinary opportunities, as telecommunications companies, their network assets, and customer bases become available. We are fortunate to have both network management expertise and financial dry powder, which will allow us to continue pursuing opportunities that create value for our stockholders."

Billionaire Warren Buffet and other investors aided the acquisition strategy with last summer's $500 million cash infusion. That investment has also helped boost Level 3’s credibility among industry observers. “Based on who’s backing them… I personally believe that Level 3 will be one of the survivors of the alternative carriers,” Johnson says.

Others see Level 3's acquisition of Genuity as beneficial to the industry at large.

"The acquisition is a good signal for the industry, which needs to eliminate redundant networks and OSS in order to return to profitability,” writes Bart Schachter, a partner at venture capital firm Blueprint Ventures, in an email to Light Reading.

Whether the upcoming acquisition will be good news for Level 3’s business or not, it is certain to come as a blow to many of the carrier’s 6,000 employees. There are clear indications that Level 3, which has chopped 2,700 jobs since 2001, is currently reducing its headcount and will reduce it further if the acquisition goes through.

According to a report in the Denver Post last Wednesday, Level 3 president Kevin O’Hara sent out an email to inform the company that 150 employees, or 2.5 percent of the workforce, would be laid off last week, and that more significant layoffs are likely to follow the Genuity acquisition.

Although the deal will still be subject to various regulatory approvals, including from the Federal Communications Commission (FCC), Level 3 and Genuity both expect the acquisition to be completed by the end of this quarter.

— Eugénie Larson, Reporter, Light Reading
BobbyMax 12/5/2012 | 12:50:02 AM
re: Level 3's In Genuity Level 3 never made a sucessful business case for its existence as a company. The company appeared on the international scene out of nowhere. The companty is involved in so many small businesses, that its chances of survival as company are minimal. Sincenothing else is happening within the company, it decided to buy Genuity.
gea 12/5/2012 | 12:49:58 AM
re: Level 3's In Genuity "Sincenothing else is happening within the company, it decided to buy Genuity."

So they decided to buy Genuity because they were BORED?

Please try to come up with some FACTS and REFERENCES. Your out-of-your-ass "anal-yses" are beyond tiring.
SweetOldWorld 12/5/2012 | 12:49:57 AM
re: Level 3's In Genuity I'd say that Level3 recently is all about smoke and mirrors.

Let's see, that "buy a company for its revenues so we don't violate our covenants" - hmmm. They tried that twice, with companies that they would NEVER consider had they been solvent. I bet they don't do that again.

The Warren Buffett thing - well, he's going to get a multi-billion dollar network for what he really values it at, a few hundred million.

So, what's to say there's nothing sinister about this deal, esp. for someone like BM who always looks for the innuendos?

toohideous 12/5/2012 | 12:49:41 AM
re: Level 3's In Genuity Hasn't anyone else discovered the IGNORE AUTHOR link? I have and haven't read a BobbyMax post in weeks. Trouble is the Article Talk is always clogged with responses. I guess I just can't win.

BTW, about 5 years ago I was at "genuity" (or whatever it was called then, GTE/BBN Internetworking?) listening to a company wide speach about growing to 5bil in revenue in 5 years (or was it 2 years?) from a couple hundred mil or so....

Interesting how it seems everyone everywhere had some pretty lofty goals.

fiber_to_toilet 12/5/2012 | 12:49:39 AM
re: Level 3's In Genuity I clicked the magic button yesterday and put the 'sauron' to rest.
WiserNow 12/5/2012 | 12:48:29 AM
re: Level 3's In Genuity
In this depressing return to the pre-reform era, it is refreshing that ONE of all the CLEC's has survived and continues to do surprising things.

I wrote off Level3 in 1999 as crazier than the crazies. But I was wrong. The crazy's died and Level3 survived. Perhaps we should try to figure out what they are doing that makes them different.
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