Level 3 Stock Draws Cheers, Jeers as Global Crossing Merger Closing Draws Closer

By Josh Long

Financial analysts are divided over the stock of Level 3 Communications, the network services provider that is merging with Global Crossing Ltd.

Piper Jaffray on Monday upgraded shares of Level 3 (LVLT) from an underweight” to a neutral,” according to media reports. The Minneapolis, Minn.-based investment bank and securities firm did not immediately respond to requests Monday for the research report.

The reported upgrade on Level 3s shares was issued less than a week D.A. Davidson & Co. analyst Donna Jaegers downgraded Level 3 to a neutral” from a buy.”

In a research note Sept. 7, Jaegers reduced 2012 estimates to account for potentially slower anticipated growth at Level 3 and Global Crossing Ltd., which Level 3 is acquiring.

We think GLBCs [Global Crossings] growth in the U.K. could go negative due to the weak economy and its growth in Latin America and Rest of World could slow from current levels,” the analyst wrote. For LVLT, both wholesale and enterprise growth could slow below 2011 levels.”

D.A. Davidson has a 12- to 18-month price target on the stock of $1.70 and a five-year price target of $5.00.

We continue to like the stock longer term and think that the cost and revenue synergies from the GLBC merger could be higher than the consensus expects,” said Jaegers, who expects Level 3 to complete its acquisition of Global Crossing in November. We do not expect pricing in IP Transit to improve in the near future, but further consolidation could result in more rational pricing longer term.”

Shares of Level 3 hit a 52-week high of $2.67 on July 7, 2011, but the stock price has fallen since that time and closed Monday at $1.52 on the NASDAQ.  Most analysts rate the stock a hold,” according to Zachs Investment Research data.

Some analysts see positive developments stemming from Level 3s $3 billion acquisition of Global Crossing.

On July 28, 2011, Raymond James analyst Frank Louthan upgraded Level 3s shares to a Market Perform” from an Underperform.”

We believe Level 3 has the ability to lower its Debt/EBITDA ratio from 6.9x down to 4.3x as a result of the acquisition, making it more attractive to investors,” Louthan wrote.

As of June 30, 2011, Level 3 had $7.2 billion in long-term debt on a consolidated basis.

Some good news for Level 3: The company is achieving gross margins in excess of 80 percent on some of its new core products, according to Louthan.

As the companys revenue continues to trend more to its core services, we look for gross margins to continue to expand,” wrote the analyst, who also noted that revenues from Level 3s wholesale voice services with 30 percent margins have been declining.

Broomfield, Colo.-based Level 3 expects its acquisition of Global Crossing to close before the end of the year, and representatives of the two companies have been asking Federal Communications Commission officials to approve the deal. The FCC is in day 95 of its unofficial 180-day review of a merger that has received little opposition. Over the years, Level 3 has acquired a number of competitors, including Broadwing Corp. and WilTel Communications Group, formerly known as Williams Communications.