Investors nervous about the burn and flow of cash within Level 3 Communications breathed a small sigh of relief last week as the wholesale carrier pushed its debt maturities ahead to 2008, giving itself more time to grow its burgeoning voice-over-IP business. But the company's simultaneous announcement that it had ended a shareholder rights plan known as a “poison pill” (thus lowering barriers to potential acquisition) gave Level 3 the posture of a property dressed for sale.

In the press release trumpeting the end of the pill, Level 3, which declined to comment on this story, said the decision “was not made in connection with any pending business transaction.” But amid a backdrop of big-carrier consolidation, the move sparked speculation that Level 3 was either advertising to would-be acquirers or trying to spark speculation.

Who might want to acquire Level 3? “Nobody,” said Donna Jaegers, a research analyst who covers the company for Janco Partners. With the $800 million note offering announced last week, Level 3 will carry about $6 billion in debt — a heavy load to anyone shopping for a long-haul network. By contrast, WilTel's network might sell for $1 billion, Jaegers said, and Broadwing's market cap is less than half that.

“Why pay $6 billion?” Jaegers said. “Unless [a buyer] can find a way to use all those empty conduits in the ground — if they're transporting white mice across the country or something.”

Level 3 also lacks the big enterprise retail customer bases that made MCI and AT&T so appealing. In addition, should, say, BellSouth be in the market for a nationwide network with which to counter the hybrid colossi of SBC/AT&T and MCI/Verizon, it might gain more advantage by buying Global Crossing, with its international reach, said Judy Reed Smith, CEO of Atlantic-ACM.

Level 3 should follow the lead of AT&T and MCI and shed some of its non-core businesses if it wants to be bought, said James Lee, DE Investment Research analyst. Whereas AT&T dropped its residential markets, and MCI dropped its debt through bankruptcy, Level 3 might consider selling its coal-mining business or its software distribution business, acquired years ago to help meet revenue covenants. Better yet, the company might liquidate what Lee considers to be one of its most valuable assets: its data center business. By Lee's rough estimate, Level 3's 66 data centers could be worth around $1.2 billion. Instead, the company cut costs by downsizing more than 500 workers last month, saving about $60 million to $70 million per year.

“By 2008, they've got over $1.3 billion of debt due,” Lee said. “The interest payment per year is $500 million. So it's pretty scary.”

In the meantime, the carrier will try to grow its wholesale VoIP business faster than its traditional transport and managed modem businesses decline. Though revenue from the new VoIP service doubled in the fourth quarter, its $24 million contribution accounted for only about 5% of Level 3's quarterly communications revenue. To grow that business, the company will need a healthy population of strong independent VoIP providers as customers, and those VoIP providers are likely to face increased pressure as big carriers consolidate. If the VoIP independents fail to advance by 2008, when Level 3's debt becomes due, the carrier could have a much more bitter pill to swallow.

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LEVEL 3: CASH AND BURN

Expected cash burn, 2004> $179M to $199M

$344M < Actual cash burn, 2004

Expected cash burn, 2005> $260M to $320M

Source: Dow Jones Newswires