Level 3 Communications (NASDAQ: LVLT) knows the pure joy of being an investor darling as well as the painfully desperate feeling of being an investor’s biggest regret and while they now sit somewhere in the middle of those two positions the international provider of IP-based communications services to enterprise, content, government and wholesale customers believes its ready to regain its favored standing among investors following their recently approved acquisition of rival Global Crossing (NASDAQ: GLBC).
Obviously there are a number of concerns that have to be answered before LVLT ever establishes such investor confidence yet the company expects that their move to the NYSE, scheduled for October 20, 2011, could certainly open the door to new possibilities as mutual funds, pension plans and investment pools that had previously refrained from investing in Level 3 due to its low share price may now reconsider. This will be done through a 1-for-15 stock split after the market closes on October 19, 2011, reducing the 3.1 billion shares LVLT currently has on the market down to about 207 million.
Of course this move is hardly a solution to the real problems that exist at LVLT and most investors see this it as little more than a band-aid placed over a gaping wound. LVLT has lost money every year for the past decade while accruing massive debt and acquiring a company like GLBC, which has a history of losing money as well, isn’t exactly a move toward stability. While the merger is expected to strengthen LVLT’s fiber-optics networks business as well as their expansion into Europe and Latin America it’s going to come at a cost.
CEO James Crowe stated “We want to keep the top line growing. The cost savings will come, but we are not in a hurry to have all the cost savings in the first week,” and that’s an understatement as CFO Sunit Patel has said the cash benefits from the GLBC deal will start appearing on Level 3′s bottom line in 2013. According to some these benefits will come as the result of expected synergies which in real terms means people losing jobs; in a Reuters report the figure was listed at hundreds, “mostly in the United States.”
While LVLT has to make some cost-cutting moves as part of their efforts to integrate their nearly $2 billion purchase of GLBC it hardly takes the sting out news. Not helping matters much has been Crowe’s comments regarding this reduction in employment as he has been quoted as saying “In large parts of the world it is very minimal. Here in the U.S. there will be some job cuts.” Crowe has also said LVLT is not experiencing any effect from the economic slowdown that has hit the U.S. and Europe, stating “If we didn’t read the newspapers or watch TV, we wouldn’t know that there is a financial problem at the moment.”
That’s not hard to say when your total compensation for 2010 amounted to more than $6.3 million yet for the shareholders of LVLT who remember when their stock was trading at more than $132 per share with a market cap of $44 billion only to see shares sink below $1 for most of the last three months of 2010, those kind of comments may not exactly put you in their favor.
Despite all of the past problems associated with LVLT there are those who still believe the company is capable of tremendous growth, and for good reason. While the bulk of LVLT’s current revenue comes from streaming movies and providing video over its network to heavyweights like Netflix, Inc. (NASDAQ: NFLX) they have identified content distribution to mobile devices as one of the prime areas of focus over the next five to ten years. Given the fact that Internet network traffic coming from mobile devices is growing well over 100% per year with that trend likely to continue it would appear as if LVLT could truly capitalize on its popularity.
In addition, LVLT’s main competitors, Akamai Technologies Inc. (NASDAQ: AKAM) and Limelight Networks Inc. (NASDAQ: LLNW), aren’t without their own financial troubles and are in no position to really slow Level 3’s progress and with just 2 percent of their core business network services revenue coming from content delivery business accounts that progress has plenty of opportunity.
An example of this opportunity can be seen in Monday’s press release regarding Wargaming.net’s decision to select Level 3 as their provider of content delivery network services to support the online delivery of game content for the popular World of Tank’s game title, a title that has expanded from its launch in the Russian Federation last year to North America and Europe with significant demand.
There is also plenty of speculation that LVLT could be positioning themselves to purchase broadband service provider PAETEC (NASDAQ: PAET), a move that could certainly boost share prices in almost the same manner that their GLBC acquisition triggered.
Right now shares are trading right around their 50-day moving average of 1.71 and their 200-day moving average of 1.69 while their 5-day trading volume average sits at a robust 85 million thanks to the recent acquisition. With their stock split coming in just a few days and their move to the NYSE more activity for LVLT is expected but if they are to sustain the enthusiasm they will have to really start producing significant revenues to counter their billions in debt. It will be interesting to watch how LVLT does on October 20, 2011 when they make their appearance on the NYSE, with shares to open around the $25 level following their split; if they don’t gain traction early it could be a bad sign for LVLT’s future.