Just a week ago some reports had surfaced that Level 3 Communications Inc. (NYSE: LVLT) was a potential buyout target. The reality is that this may depend on reports versus potentiality, and there would be many potential hurdles to consider. A new report from Merrill Lynch outlines whether Level 3 is really evaluating alternatives. As noted a week ago, the reports remain unconfirmed, and some aspects that have been speculated about seem very similar to reports from late in 2015 and before.

Merrill Lynch’s Jessica Reif Cohen has keyed in on what the deal chances are and around what a potential deal might actually price. Level 3 Communications has a Neutral rating with a $60 price objective.

Monday’s report focuses on what sort of fit Level 3 would be for Comcast Corp. (NASDAQ: CMCSA), which Merrill Lynch rates as Buy with a $84 price objective. Cohen thinks this would make a good strategic fit as Comcast moves up market and into servicing enterprise customers.

Four issues were brought up by Merrill Lynch. Level 3 would provide a broad set of network assets and superior enterprise sales capabilities that would enhance Comcast’s sales proposition to enterprise customers. Another issue is that a nationwide carrier network build-up by Comcast would take significant time and delay Comcast’s effort to enter enterprise servicing in a robust manner. Also cited is that Level 3 is capturing market share from AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). And if an acquisition were to proceed, it would likely be accretive to earnings and cash flow.

The new report said:

Synergies associated with a Comcast/Level 3 combination would likely be limited, in our view. Historic alternative carrier synergy forecasts range from 3% to 56% of target OPEX. However, based on few overlapping network assets, the 20 year IRU (indefeasible right of issue) Comcast signed with Level 3 in 2004 for inter-city and metro fiber (cash cost of IRUs is largely borne upfront), and the strategic value of Level 3’s salesforce, for example, we see few large cost cutting opportunities. We believe Level 3’s roughly $9.8 billion in net operating losses (NOLs) would be restrict …

Level 3 is projected here to have the possibility to be 5% earnings accretive to Comcast shareholders in 2017. This is assuming a half-stock and half-cash deal at a 25% premium for Level 3 shares. Such a premium would generate a deal price of $70.41 for Level 3 shares. One problem is that the gross debt needed would drive the debt-to-EBITDA level up to 2.5 times, and that is above Comcast’s target of 2.0 times.

Another scenario is that an all-stock deal (with Comcast issuing new shares) could be 2% accretive to Comcast’s earnings and raise that gross debt-to-EBITDA ratio to 2.1 times. Cohen said:

From a balance sheet flexibility perspective, we estimate Comcast may need 3 to 4 years to de-lever back towards its 2 times target range, potentially limiting Comcast’s ability to pursue other strategic opportunities.

One issue that 24/7 Wall St. brought up was one of serious regulatory concerns. The Merrill Lynch view is that regulatory concerns likely would inhibit a deal prior to this year’s elections in November. The report said:

While we believe the industrial logic behind a Comcast acquisition of Level 3 is sound, low regulatory visibility could delay any decision until at least after the U.S. presidential election. While Comcast has announced a number of acquisitions since its deal for Time Warner Cable was rejected by regulators, the acquisitions (e.g. DWA) have not required FCC approval and have not revolved around providing data services (which was clearly the central focus of regulators in examining and rejecting the TWC acquisition). Further, as the pool of potential Level 3 suitors is somewhat limited by valuation and strategic value, we do not believe Comcast is compelled to rush into an acquisition. Additionally, with a recent reorganization that essentially created a wireless division we believe Comcast is more likely to focus on those efforts in the near-term.

This is one of those research reports that may not exactly smack investors with a message that a merger announcement is imminent. Nor does it automatically imply that a huge premium may be expected. Still, investors have to know that almost anything is possible these days. A $20 billion market cap, or even a $25 billion market cap after a 25% premium, can be accomplished easier than ever if there are no regulatory efforts made to block a deal. Those low interest rates are good for something.

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Several other issues have been cited in recent days. Oppenheimer actually thinks that Level 3 is more likely to try to make an acquisition of its own rather than to be acquired.

24/7 Wall St. reached out to the media relations department of Level 3 last week, 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.

Now consider that in late 2015 Goldman Sachs signaled buybacks ahead, and a report from Cowen also previously suggested that buybacks may be coming. Gabelli recently showed a $73 private market value (PMV). 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.

Level 3 shares were last seen flat at $56.66, versus a 52-week range of $40.86 to $57.59. The consensus analyst price target is $62.00, and the highest official analyst price target in the official Thomson Reuters universe is $67.

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