If there is one infrastructure play in communications that would make a crown jewel of an acquisition, Level 3 Communications Inc. (NYSE: LVLT) would fit that bill. In fact, it has for years been considered by 24/7 Wall St. a key dream target for a host of potential acquirers.

There is just one small problem (or more than a couple) in chasing the rumors and market chatter that drove shares higher on Wednesday, and that’s more than just that Level 3’s valuations are high. What investors better be considering with the stock market at all-time highs is what it would really take to acquire Level 3 and what price this would be valued at if a deal fell apart.

The impetus for buyout talk has been around would-be market reports, but not every indication was just for a sale of the company. One thing to consider is that Level 3 acquired TW Telecom in 2014 for cash and stock. That deal was valued at more than $5 billion. The company’s market cap is now $20 billion with shares at a decade high.

24/7 Wall St. reached out to the media relations department of Level 3 and the company confirmed what most investors might have expected:

We don’t comment on rumors or speculation, so we won’t be issuing a statement on this.

If the rumors end up just proving to be a buyback of shares, keep in mind that Goldman Sachs was already signaling buybacks ahead in late-2015. Cowen also previously suggested that buybacks may be coming.

Here are five considerations, along with additional outside analyst views after that, for investors to consider before they blindly chase buyout or other rumors.

1. Regulatory Approval Hurdles

The Federal Communications Commission would have a say on top of normal FTC/DOJ approvals here. Level 3 is a crown jewel asset for its communications infrastructure assets. It is no secret that communications and other segments are being policed heavily, particularly if it could be proven that it might interfere with net neutrality or might drive up costs for businesses and consumers.

2. Valuation Might Interrupt Premium Prices

Considering a $20 billion acquisition is no chump change. Also, Level 3 is valued at 32 times expected 2016 earnings and at 25 times expected 2017 earnings. It would also be valued at nearly seven times expected 2017 EBITDA, which is not exactly cheap.
3. Analysts Might Be Keeping a Cap on Expected Premium

The consensus analyst price target from Thomson Reuters is roughly $62, and the media analyst target price is $62.50. Of the current analyst ratings, there were 13 Buy (or stronger) ratings and six Hold ratings. While we compiled a montage of recent analyst comments (see below), it just might require too large of a premium for a buyer unless the analysts all have Level 3 undervalued.

4. Level 3 Already Had Debt on Its Own

Using the term “leveraged” is up for interpretation. Investors need to consider that Level 3 made an acquisition of TW Telecom back in 2014, valued somewhere close to $5 billion in cash and stock. Its total long-term debt is close to $11 billion, which is thankfully less than its market value but would still have to be absorbed by an acquirer. Its cash and investments were listed as $1.8 billion as of March 31.

5. Insiders Have Been Selling Stock

If a corporate insider is expecting his or her company to be acquired, even if they are involved in planned share sales, one might wonder if they would be a bit lighter on selling their stock if a buyout is imminent. Level 3 insiders have sold nearly 200,000 shares since the start of June — with no significant insider buying.

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Level 3 Communications offers a host of integrated voice and data communications services and is one of the biggest and best in the world of its kind. It operates in North America, EMEA and Latin America. Level 3 would be a crown jewel for an acquirer, but there would obviously be some hurdles. Additional recent analyst commentary was shown below.

S&P Capital IQ has a Buy rating and a $62 price target. S&P said of its financial trends as of the end of 2015:

As of the end of 2015, the company had over $10 billion of net debt, or 3.8X 2015 annualized adjusted EBITDA. Interest costs continue to impede the company’s ability to generate substantial free cash flow, despite impressive EBITDA growth. While network capabilities from prior acquisitions have reduced some capital spending needs, the company continues to increase its capital spending budget to drive revenue growth.

Gabelli had a $73 private market value. The firm said back in May:

With leverage continuing to come down (3.6x net debt to TTM Adjusted EBITDA as of 3/31/16) and FCF generation improving, potential for returning cash to shareholders (likely through buybacks) and accretive M&A (likely focused on EMEA and/or LatAm) is rising. In the long-run, Level 3 could become an acquisition target for a large global telecom service provider or a cable operator looking to increase its presence in the enterprise space. Level 3 is trading at ~9.2x 2017P Adjusted EBITDA and at a 29% discount to 2017 PMV estimate of $73 per share.

Merrill Lynch was more recently out with a Neutral rating on Level 3, with a $60 price objective.

Level 3 shares closed up 3.5% at $56.30 on July 13, with a 52-week range of $40.86 to $57.59. The highest analyst target in the official Thomson Reuters universe is $67.00. Can a buyout take place, or could Level 3 make another sort of announcement? Anything is possible.

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