Level 3's In Genuity
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