The world of M&A often takes strange turns.  This morning comes news of a merger of two cult stocks in the communications world between two companies that have never really been able to regain their glory days.  Level 3 Communications, Inc. (NASDAQ: LVLT) is acquiring Global Crossing Limited (NASDAQ: GLBC).  The deal will be a stock-for-stock tax-free merger. Based on Level 3’s closing stock price on Friday, the transaction is valued at $23.04 per Global Crossing common or preferred share.

What will the new company be?  The combined company will now offer interconnected fiber optic networks on three continents in more than 50 countries and connections to more than 70 countries. Pro forma combined 2010 revenues would have been $6.26 billion and pro forma adjusted EBITDA of $1.27 billion ‘before synergies’ and $1.57 billion ‘after expected synergies.’

The deal will bring Global Crossing shareholders a sum of 16 (sixteen) Level 3 common shares for each share of Global Crossing common stock or preferred stock.  All in all, the merger is valued at $3 billion if you include the $1.1 billlion debt assumption.  Global Crossing has approximately 79 million basic and preferred shares outstanding, with about 83 million shares outstanding on a fully diluted basis. 

Making deals in carrier communications is not always a win nor is it an easy task.  Level 3 is a highly leveraged company and its shares have either been flirting with penny-stock status or have had a tiny share price for longer than memory serves.  Global Crossing never fully recovered from its fall from grace and many investors have forgotten about the company entirely.

It would be easy to point out the history of two entities and to just bash the deal.  If the synergies can really be realized then there is a chance that the combined entity can one day begin reporting real profits rather than simply reporting on an EBITDA basis or just on quarterly cash flows.

Level 3 closed Friday at $1.44 and its 52-week trading range is $0.83 to $1.77.  Its common stock’s equity market cap is $2.4 billion but the company has well over $6 billlion in long-term debt which keeps getting rolled over and over through time.  Global Crossing closed at $14.80 and its 52-week range is $10.09 to $17.75.

Marrying these two networks ma not be the easiest task in the world and it is impossible to just give the benefit of the doubt to two companies with the histories that these two have.  We’ll wait and see on this one… more than just very skeptically, of course.  This almost feels like the prom king and prom queen finally getting married in real life but only after they are in their seventies.

JON C. OGG

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