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Level 3, Sanborn Maps and Burlington Northern Santa Fe

September 22, 2010
If nothing else, after reading this, you will know something you probably didn't about Sanborn Maps and Burlington Northern Santa Fe.

Thesis

Level 3 trades at a huge discount to replacement cost and this gap is likely to close within a few years. If it does, Level 3 will be a good long-term investment due to its unique and irreplaceable assets.

Value

In essence, Level 3 (like Peter Kiewit, its Omaha based former parent) provides vital infrastructure. In 1985, Walter Scott and James Crowe decided it was a good idea to lay conduits (= pipes/ducts) along the railway tracks connecting all major US cities.

This is something you want to do well once. Scott and Crowe's idea of doing it well meant they burried 10-16 pipes along the tracks of Burlington and other railway companies. They filled one conduit with some fiber optic cable. This network is the single best Internet backbone by far. 92% of all the worlds ISPs pay Level 3 for the priviledge of connecting to this backbone. http://as-rank.caida.org/

In return, data originating on Level 3's networks, gets a free ride on every single IP network on the planet ! Companies that do not pay Level 3 to connect (true peers) are Qwest, Verizon Business Sprint, TeliaSonera, NTT Communications, Tinet, Global Crossing, Savvis, AT&T and Tata Communications. The list is dynamic; read the article http://en.wikipedia.org/wiki/Tier_1_network

Remember, that is one of a dozen conduits filled. No one has a national network of conduits that comes close. There are many global IP networks and they typically use Level 3's routes.

Others have caught on to the idea of laying down fiber along railroad tracks. Not on a national scale mind you and no extra conduits... What they do is mount a plough on a railroad car and connect two points. The good news is that this provides us with an estimate of the replacement value of Level 3's assets. http://www.telecomramblings.com/2010/05/allied-fiber-splashes-into-the-fiber-pool/ http://www.heraldtribune.com/article/20100909/ARTICLE/9091064?p=1&tc=pg

$100k per long-haul mile...... x 54k miles = 5.5 B

In the case of Level 3 we are talking about a national network and not just a single route that is useless for a company like say..... hulu.com

IMHO Level 3 could sell 2 of its 12 nation wide conduits to a knowledgeable buyer and repay its long term debt. This is probably why some gurus were willing to buy all that debt. I can also see why mr. Crowe would rather cut off his right arm than sell one of his conduits.

Level3 also owns some 27k miles of Metropolitan fiber. The replacement cost of these assets is…… prohibitive. But let’s use $ 150k per mile. Estimates you find that ammount to less probably don’t include the RoW (Rights of Way) or may be based on the cost of installing the stuff in an existing conduit. $150k per metro mile x 27k miles = 4 B

150k makes sense. Doing this in a city is probably more expensive than doing a deal with a railway company and sending a railcar mounted plow down the line. Of course, Level 3 has lit many miles of fiber with expensive network gear (transceivers) and owns the best trans-atlantic routes. They also own some stuff in Asia and Europe..... but this article is too short. 3 B

Level 3 claims the current replacement cost of its assets is about 23B. Well, I'm a pessimist.

Level 3 is selling the network capacity from that single network on one of its conduits to wireless customers, cable customers, internet companies and traditional carriers. They offer these customers both long haul and metro connectivity. The fact that the data can then travel anywhere on the planet at no cost gives Level 3 a cost advantage over a number of competitors (Q, GLBC, XO). These companies have to buy either metro connectivity or Long-haul. I believe this business will grow at double digits over my lifetime.

Let's kill this thesis

1) I don't buy replacement value arguments. The excess conduit laid down during the great silliness should last 100 years.

That’s right, at least in Level 3’s case. You do it right, once. It’s a good thing, as long as you can eventually earn a reasonable return on capital. That day will come when demand catches up with supply.

2) Many similar companies have been sunk by their debt; wiping out the equity.

Yes, but not Level 3. These guys have been at the helm for two decades and have, again and again, managed to secure backing from poeple with deep pockets (Warren Buffett, Francis Chou, Prem Watsa, Mason Hawkins). These guys bought all the (convertible) debt they could. Some are now buying the equity directly.

3) This thesis has brought nothing but grief to investors since 2002.

No. The company never sold for less than my pessimistic estimate of replacement value.

4) Why Level 3 ? XO, Q etc. etc. compete but earn profits.

Good point; but most of these have been restructured. Equity was wiped and debt reduced. PP&E (the cost of those cables) written down to nothing. Now all they have to do so the accountant can report profits is buy some transceivers and depreciate/maintain those. They no longer deal with repaying the debt and depreciating the cost of the network. They understate Capex !

Level 3 is losing money because capex reflects economic reality. Also, they still carry that debt. The good news is, Level 3 now has big NOLs. Some of these guys used to work at Leucadia. The NOLs are one reason Hawkins and Watsa would not want to trigger a change of ownership.


Why now ?

1) Burying fiber has become fashionable once again. Demand has caught up.

2) Level 3 has increased its sales force bigtime. They finally start selling now that they believe there is cash to be earned; no use selling stuff at a loss…. http://seekingalpha.com/article/187901-level-3-communications-inc-q4-2009-earnings-call-transcript

3) Google is buying dark (=unlit) fiber. Probably not because they think bandwidth will forever get cheaper. http://www.internetoutsider.com/2006/04/how_much_dark_f.html http://gigaom.com/2008/02/25/googlenet-update-google-buys-a-piece-of-transpacific-cable/ http://news.cnet.com/Google-wants-dark-fiber/2100-1034_3-5537392.html

4) Insiders are buying. http://www.gurufocus.com/InsiderBuy.php?symbol=LVLT


Is there something to worry about ?

- We are wrong about LVLT’s cost advantage

- A 4th competitor (besides LVLT, T and VZ) is able to create an end-to-end network.

- Slower than expected demand growth due to a reduced rate of broadband adoption, etc


Is there something I should let others worry about ?

- Google will kill them all….. No. Google looking for bandwidth is a good thing. They see a problem brewing.

- Wireless is the future, cables are yesterday….. LOL you need to carry all that local wireless data across the nation. Wireless solutions are not going to do that. Never, really ! Laws of nature prevent this.


And before I forget..... Sanborn Maps recently became a client of Level 3. Their data now runs along the track of Burlington Northern (remember those conduits). Sanborn used to ship their stuff to clients on disk drives. http://seekingalpha.com/article/187901-level-3-communications-inc-q4-2009-earnings-call-transcript

Any and all comments and questions welcome as usual.

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 3.9/5 (38 votes)

Comments

DocMoney
DocMoney - 3 years ago
Batbeer - nice, BUT...

1. The company's market cap may not have changed much but they have diluted existing owners by about a third in the last 4 years.

2. In 2006-7, when the economy presumably was "better," owner's earnings were still negative.

3. Why are we so dismissive of VZ, T and Sprint's ability to compete with LVLT?

4. Is it possible that satellite technology may replace cable for progressively more applications? GeoEye's satellites transmit many high resolution images and must have fast enough transmission speed for that...

Overall, excellent analysis. Keep it up. You are clearly very thorough and organized. I learned a lot from your work.
PIXARR
PIXARR - 3 years ago
I made some quick notes from a Longleaf Partner's call:

· Fill the pipeline cover depreciation and interest cost—huge operating leverage

· Revenues are growing, costs are fixed

· Industry consolidation

· No tax and no cap ex

· Free Cash Flow

· Competition, cost structure not an issue

· Big customers need to spend on network

· Capital intensive history—tax shelter

· Movie streaming—video chat, YouTube, HD, 3D

softdude2000
Softdude2000 - 3 years ago
batbeer, nice article. I own LVLT for 3 years and I am disappointed with lack of pricing power. I did not find the data but came to know there is lot of bandwidth available. Can you point me to any link that relates different kinds of demand, supply and pricing of different services. Any links to help me understand this bandwidth market dynamics will be helpful. Thank you. I thought LVLT as a railway company with huge initial investment and I am completely wrong in that there is plenty of bandwidth.

Docmoney, just check out the speeds/capacity of fiber network and satellite. I dont think there is alternate to optical fiber network with current technology.
batbeer2
Batbeer2 premium member - 3 years ago
Thanks for the questions and comments.

Any links to help me understand this bandwidth market dynamics will be helpful.

That is hard. It's how you think about the information generally available; but here's my best shot.

The price for bandwidth is typically stated in $/Gbps. The important metric for Level 3 though (near term) is the price per conduit (in this context it means a circuit in a fiber). 99.9% of investors look at the cost per Gbps. Light up a strand of fiber with two transceivers and you can send 1Gb, 10Gb, 40Gb or, today, 100Gb down the line every second. The transceivers get increasingly expensive, but once they are in place, every Gbps you sell drops to the bottom line. In its simplest form, an optical conduit is a pair of simple (non multiplexing) transceivers; one on each end of a fiber.

Bears say transceivers will get ever better. IMO they are half right. There is a limit to what you can do with transceivers. Transatlantic optical cables have been decommissiond. TAT-8 is an example http://en.wikipedia.org/wiki/TAT-8 Also, upgrading transceivers (because you have run out of dark fiber) is not as cheap as lighting up an extra pair with the cheapest transceivers you can lay your hands on. This is what we have been doing since 2000.

On transatlantic routes, the price per Gb/s has stabililised. That's incredible. It means the price per conduit (in this context it's a submerged optical circuit) has risen dramatically They upgrade the conduits (new transceivers that are 10 times more efficient) and are able to sell the new, 10x fatter, pipe for the same price per Gb ! http://www.telegeography.com/cu/article.php?article_id=33320

If I'm right, we will see bubbles rising from the bottom of the Atlantic in a couple of years. One problem is that there are repeaters every 80 miles or so; this is not one long strand of fiber from London to New York. You can't just put your standard 40Gb transceiver at each end of your fiber. The submerged repeaters are not easily replaced ;-) On land, you have fewer problems.

Notice the difference in price between Pacific cables (more in balance) and the Atlanic (coming back from the dot-com overkill. The two will converge. Mind you, the price per Gb will inevitably go down, but the cost of the underlying conduits will rise. Replacement cost is becoming a factor. http://www.telegeography.com/cu/article.php?article_id=28963

I have tried (and failed) to find useful data for the market price of conduits (=circuits). An uptick in prices means unused fiber is getting scarce in places. Upgrading transceivers changes the economics for all players and once that ends (in a decade or so) then.... those empty ducts Level 3 owns get really interesting. For now, I derive the dynamic from the actions of knowledgeable market participants. Hawkins, Google, Verizon. Anytime you see the price per GB stabilising, it means the underlyng fiber is getting more expensive at double digit rates.

The company's market cap may not have changed much but they have diluted existing owners by about a third in the last 4 years.

You need to trust management on this. If you look into each deal, it seems LVLT management is very smart, just more patient than most. Each time they scoop up assets (and dilute current holders) knowledgeable poeple think it's a good deal based on the underlying assets. I think of it this way.... Management also adds to replacemnet value as it increases the number of shares. I would like it more if they generated enough cash to grow without diluting shareholders.

In 2006-7, when the economy presumably was "better," owner's earnings were still negative.

Yes, but they were not even trying. Compare the sales force then and now. Waiting for prices to stabilise before selling stuff IMO is shareholder friendly for long-term holders.

Why are we so dismissive of VZ, T and Sprint's ability to compete with LVLT?

Mason Hawkins is long VZ too so it may be a good investment. T's assets are more diverse. I have forgotten more about networks than most poeple will ever know about them; I can get my head round LVLT but T is too hard. Sprint IMHO has an inferior physical network compared to LVLT.

Corning (GLW) may be a way to play this thesis if you like more stable (black not red) numbers. I would appreciate someone trying to find out how much fiber they are selling and where the stuff ends up. One would not expect the stuff to end up in the US if there is still massive oversupply. from their 10-k

Corning has two large optical fiber manufacturing facilities in North Carolina and another facility in China. As a result of lowered demand for optical fiber products, in 2002 Corning mothballed its optical fiber manufacturing facility in Concord, North Carolina and transferred certain capabilities to its Wilmington, North Carolina facility. In 2007, Corning reopened a portion of the Concord, North Carolina facility primarily as a result of volume growth in the optical fiber market.

Is it possible that satellite technology may replace cable for progressively more applications?

No. It is physically not possible to provide the same bandwidth with Radio frequencies in the sky as you can have with multiple frequencies of light in glass. One, the transmitters will consume too much energy. Two, the frequencies will interfere. Take your laptop.... does the battery last longer if you plug in a netwok cable or if you just leave your wifi on ? Have you ever heard of a datacenter running wireless internally ?

I learned a lot from your work.

So did I.

You are clearly very thorough and organized.

ROFL.... Thank you, we must meet some day.
the Spark
The Spark - 3 years ago


Your work made me take a look at Sanborn Maps, where, of course, Buffett made a killing almost half a century ago. It appears he would have done just fine holding on to the company too. The company appears to have grown substantiallysince he sold, though I have no idea what a compounded return might have been since the sale.
Sivaram
Sivaram - 3 years ago
Good job with the writeup Batbeer... but I have to take a bearish view on this.

This is one super-high-risk stock. Correct me if I'm wrong but this is a company that has not posted a profit in 10 years; has mostly posted negative free cash flow (except for the odd period); has massive leverage (debt/equity over 10x); and barely did well during the "good times."

This stock is worth owning after a bankrupty and restructuring...
softdude2000
Softdude2000 - 3 years ago
Sivaram, nice to see your response. I can understand pessimism on LVLT and your response on LVLT is very reasonable. Just curious, are you bullish on any stocks?
batbeer2
Batbeer2 premium member - 3 years ago
Hi Sivaram,

I understand your position. I do not perceive this to be high risk though. Reasonable minds can disagree. Unreasonable minds too ;-)

You look at the numbers and you want to well.... puke. Few poeple take the time to look at the assets and the track record of LVLT's management. Those that do are impressed. Quality and integrity of the CEO is on par with LUK, CSWC and BRK. Many investors have a proces of screening for good numbers and then investigating the company. LVLT scores high marks on Phil Fishers 15 points. He had a very different proces.

This stock is worth owning after a bankrupty and restructuring...

That is certainly true but management is doing all they can to avoid this. I think there is a very high "risk" they avoid bankruptcy. In a sense, they are slowly restructuring. Conserving their NOL as best they can and swapping debt for equity in a controlled manner. Playing for time till demand catches up. IMO this is commendable. Their first responsibility is to shareholders.

Other managements in this business have taken their companies through bankruptcy and are proud of the fact. Those businesses look better in the short term. One could argue management put their own interest ahead of owners.
jake75
Jake75 premium member - 3 years ago


Highly competitive industry and huge debt load (~$6B). Moreover, revenues/margins/EBITDA declining. Agree with Siv, perhaps worth taking a look at after bankruptcy/restructure.
batbeer2
Batbeer2 premium member - 3 years ago
@Jake75

Thanks for the comment.

You accurately summarise the gloomy consensus. I interpret the facts differently. It remains to be seen if I do so correctly.
Sivaram
Sivaram - 3 years ago


Sivaram, nice to see your response. I can understand pessimism on LVLT and your response on LVLT is very reasonable. Just curious, are you bullish on any stocks?


I'm just a newbie with a poor record so with that in mind...

I'm not really a true value investor and am more macro-oriented and given my bearish macro outlook, I have to say I'm kind of bearish in general. I keep looking for ideas and nothing has really caught my eye but I am researching some ideas, such as Barnes & Noble (BKS), Nokia (NOK), Megabrands (TSX: MB), Livenation (LYV), etc.

What was your original thesis for investing in Level 3? And given how the situation has deterioriated, what do you think can lead to improvement in Level 3's business?
Sivaram
Sivaram - 3 years ago


Hi Sivaram,

I understand your position. I do not perceive this to be high risk though. Reasonable minds can disagree. Unreasonable minds too ;-)

You look at the numbers and you want to well.... puke. Few poeple take the time to look at the assets and the track record of LVLT's management. Those that do are impressed. Quality and integrity of the CEO is on par with LUK, CSWC and BRK. Many investors have a proces of screening for good numbers and then investigating the company. LVLT scores high marks on Phil Fishers 15 points. He had a very different proces.

[i]This stock is worth owning after a bankrupty and restructuring...


That is certainly true but management is doing all they can to avoid this. I think there is a very high "risk" they avoid bankruptcy. In a sense, they are very slowly restructuring. Conserving their NOL as best they can and swapping debt for equity in a controlled manner. Playing for time till demand catches up. IMO this is commendable. Their first responsibility is to shareholders.

Other managements in this business have taken their companies through bankruptcy and are proud of the fact. Those businesses look better in the short term. One could argue management put their own interest ahead of owners. [/i]




Before I say anything, I should note that I am not predicting that Level 3 will go bankrupt; and I'm not hoping it does either. I don't know management but I don't think they want to see it happen either. I also don't want any of you shareholders to suffer. All I'm saying is that the company is severely burdened by its debtload.

I'm a contrarian and have looked at dubious businesses with high leverage in the past. I have investigated forestry companies, auto suppliers, newspapers, and so forth--all posting huge losses and big debtloads (at least when I look at them). But Level 3 looks very risky even for me.

The problem with Level 3 is that they have never posted a profit in 10 years!!! Other cyclical companies like forestry companies have at least had positive income in the past; not so here.

Based on last year's numbers, they seem to be paying a little over $500 million in interest every year. This for a company that has generally had negative operating income and positive operating income nowhere near $500M. Basically, this is a company that has stayed alive by issuing shares or debt.

Level 3 bulls need to explain how the company is going to cover its interest payments without issuing more debt or shares. Converting debt to shares may be a solution but shareholders will pay a price.

Based on Batbeer's write-up, it seems Level 3 has very attractive, hard-to-duplicate, assets. But can the company make money off them? It is quite possible that even if the macro outlook for, say, bandwidth consumption, is bullish, this may be a deflationary industry (most new technology tends to be inherently deflationary, including telecom and wireless communications.) Level 3's revenue has gone nowhere in 5 years so it's hard to see sales growth saving the company.

It's possible, maybe even likely, that Level 3 had high capex spending in the past to build up the network. So the free cash flow number probably looks worse than it is (i.e. most of capex is growth capex and not maintenance capex.) But can the bulls be sure that capex will decline materially in the future?



Based on my limited knowledge, I would say the only hope for Level 3 is that it turns into an Amazon. By that, I am referring to the fact that Amazon posted losses for many years in the early 2000's and had very high capex but it was mostly an illusion because it was building its business. If Level 3 can significantly reduce capex spending and SG&A now that the network is built, it may do well. There is still the big debtload but if earnings flip to a positive number, debt should be manageable. The problem with the Amazon comparison is that the macro picture was very bright for Amazon (online retail was almost certain to increase over the years) whereas the Level 3 business is difficult to say (some on this thread already speculate that wireless and satellite communications may be a threat; future innovations such as improved compression of data is also an issue).

batbeer2
Batbeer2 premium member - 3 years ago
If Level 3 can significantly reduce capex spending and SG&A now that the network is built, it may do well.

I don't think Level 3 will spend less on Capex (in dollar terms) going forward. I do think competition will have to. Revenue and margins at Level 3 will rise as a result. As a percentage of sales, yes, capex will go down.

Your Amazon comparison, otherwise, seems apt.
batbeer2
Batbeer2 premium member - 3 years ago
An interesting thread; the comments are worth reading. It sheds some light on the relative value of the networks of XO, Q, S and T. Also, it seems LVLT used to be a short seller of bandwidth.

http://www.telecomramblings.com/2008/07/selling-dark-fiber/
batbeer2
Batbeer2 premium member - 3 years ago
I was doing some further research and I come accross my own stuff.

http://www.investorvillage.com/smbd.asp?mb=444&mn=96929&pt=msg&mid=9551303

I don't know you "vmayerczak" but if you are reading this, AT THE VERY LEAST provide a link to the original. I'm not able to comment there without becoming a member. They charge you for that,

Very annoying.

I post exclusively on gurufocus.
augustabound
Augustabound - 3 years ago
That's offside.

Sivaram
Sivaram - 3 years ago
Yikes, can't believe someone stole your post Batbeer2. Amazing how people won't even credit the original author. Anyway, coming back to your investment proposal...

I still don't see how Level 3 is going to increase its revenue, at least at a minimum to cover interest payments. I know you are saying that prices appear to have stabilized but how can you be sure that this isn't a deflating industry (in terms of overall industry pricing)?

Having said that, I admit that this company has some "hidden" potential due to items you have mentioned, such as NOLs, hard-to-replace assets, etc.
batbeer2
Batbeer2 premium member - 3 years ago
I still don't see how Level 3 is going to increase its revenue, at least at a minimum to cover interest payments.

OK, this gets a bit technical....

Ten years ago, your typical fiber backbone would be configured with 1Gb/s transceivers (sometimes in parallel). Five years ago 10Gbps became standard. Today you see 40Gb/s transceivers popping up and 100Gb/s transceivers are being developped. This is why wholesale bandwdith costs 10% of what it did in 2002. Operating a 10GB line costs the same as operating a 1Gb line. Deflation is not a force of nature, it is the result of supply and demand.

Some of the cable installed can't handle 10Gb/s and a lot of it can't handle 40Gb/s. Guess who doesn't have problems in that department.

You replace 10Gb/s transceivers with 40Gb/s transceivers and you have increased your bandwidth fourfold. You sell the new capacity at half the price but your operaing cost remains the same. That is what this market will look like in 5 years.

Level 3 basically refuses to sell 1Gb/s pipes. They do not have an edge. Someone with some dated fiber and some old transceivers will kill you on price. 5 x 1Gb/s is still a 5Gb/s pipe. I find it interesting that Level 3 is taking the long-haul fiber it acquired with Broadwing offline. The opering costs are too high. Better to send the date over the fatter 10G pipes they allready operate.

Till now, the only demand for really fat pipes was from other providers. Level 3 was and is the undisputed low-cost provider of providers.

Now that businesses like Sanborn are ordering really fat pipes, you see Level 3 entering that market. That is why they were not aggressively growing revenue.... till now. Again, look at what they have done to their sales force. You do not need a big sales organisation to sell to other providers. Selling directly to businesses is another matter. Level 3 fiber passes near the greates ammount of buildings.... period. It was just not worth competing with the moms and pops till now.

Of course, competition can start installing the latest fiber and sell fat pipes too.... which brings me back to those empty ducts I started with. It is soooo much cheaper to pull some new fiber through an existing duct.

You see..... from where I sit, it's a matter of time. I don't worry much about the debt because these assets are worth much more to knowledgeable buyers.

just my 2 cts.
jake75
Jake75 premium member - 3 years ago


You in the industry Bat? Just curious.
batbeer2
Batbeer2 premium member - 3 years ago
I wouldn't say I'm in the industry, but I'm comfortable with the technical aspects.

I spent about 10 years designing and troubleshooting LANs, WANs and SANs. On some level they are the same thing. Just different bandwidths. Also, with WANs the client is usually not the owner of the infrastructure. I also used to teach poeple preparing for Cisco exams.... till about 2003.

Now that I'm old, slow and frail, I spend 80% of my time at meetings discussing plans, budgets and the color of the next car of my bosses wife.

I think I have forgotten more about networks than most poeple will ever know.
softdude2000
Softdude2000 - 3 years ago
I am even more scared now that we will potentially have 10 times or even 100 times more supply compared to 2001. Even if it is a low cost provider, LVLT cannot benifit if there is no demand. So there is more blood bath in the bandwidth business. For me it looks like companies that charge consumers will benifit because they could still charge same. So customers of LVLT will benifit but end users and LVLT may not benifit.
batbeer2
Batbeer2 premium member - 3 years ago
I am even more scared now that we will potentially have 10 times or even 100 times more supply compared to 2001.

Yes, that is mindboggling. It is a distinct possibility that this takes another decade to work out. I'm betting that is not the case because most are not going to be able to scale up including those now supplying directly to customers. The DSL guys are toast, just like the dial-up guys before.

If I'm right, there will be time to get in. LVLT will pop at the first sign of good revenue growth, but it will have a long long way to go after that..... again if I'm right.
Sivaram
Sivaram - 3 years ago


If Level 3 is the low cost producer, how come it was posting losses all the time? Is that because it was building its business (like Amazon a while ago)? Or is this just a bad industry plagued by overcapacity (kind of like autos and airlines most of the time)?

As softdude2000 alludes to, in all industries, some sub-segments do well while others don't (at least from a shareholder point of view). It's still not clear what makes Level 3 "special" and give one confidence in their ability to generate profits.
batbeer2
Batbeer2 premium member - 3 years ago
It's still not clear what makes Level 3 "special"

Here goes the summary.

1) Level 3 currently has the best national network of high capacity fiber.... by far ! They need fewer transceivers to create fatter pipes. That is why they have the fattest pipes. Others do not have smaller pipes because those are cheaper to run. They bundle ten smaller pipes and fake it.

2) Level 3 has the only national network of empty conduits.... period. And they have a dozen. By the time America needs additional fiber, Level 3 can install it at a fraction (say 10%) of the cost to others. Just pull some cable through the empty conduits; the cord you need to yank is preinstalled.

So why are the numbers so bad ?

1) They deliberately created an IP network that was at least a decade ahead of its time. Till now, other carriers were the only clients that required such pipes.

2) Local players would (and still do) connect 1000 clients with some fiber or DSL or whatever and then lease a pipe from Level 3 to send the data accross the nation and ocean.

Level 3 just couldn't and wouldn't compete in that space as long as the typical client required 10-100Mb/s. Clients requiring 10Gb/s on a national scale universally go to Level 3. There were just not enough of them.

This will change because:

Demand for bandwidth at the client side grows at 30-60% annually. The cheap, fat, pipes will terminate ever closer to the client. That is what is happening now. That pipe will end up first in your office and then in your home.

Not for one minute do I believe "the added value client service" stuff is going to convince a client to not order the fattest, lowest latency, pipe available.

- Cloud computing

- HD TV

- Hulu, Youtube, Skype

- Smartphines with video and apps

you name it

If Walter Scott was going to create a telecom company to last 100 years, this was the only way he knew how. Create massive (endlessly scalable) overcapacity and wait... wait.... wait.... Did I mention Walter sits on the board of Berkshire ?

I'm not trying to convince anyone of anything, just trying to put things as clearly as I can. Your "poking" is much appreciated. It forces me to think/write clearly.
Alexs
Alexs - 3 years ago
Thanks so much for sharing your work, it is very helpful. Something I still don´t understand is why they haven´t managed to grow revenues during the last few years. I mean 2008 was understandable, even beginning 2009 as carriers were just reducing the typical margin of safety they leave for high usage peaks, but 2010 has arrived and their revs are still flat. Is it solely because of pricing? Do you think the driver will be 1gb businesses going into 10gbs and switching from local players into LVLT?? Thanks again for your help
batbeer2
Batbeer2 premium member - 3 years ago
Hi Alexs,

Something I still don´t understand is why they haven´t managed to grow revenues during the last few years.

I'll take that as a question. The only "bullish" answer I have is that they weren't trying. The CEO is certainly capable of sitting on his hands if he does not see profitable deals. Revenue for revenues sake..... They doubled their sales force this year. Till now, they were happy to be a providers provider. That does not require twohundred and thirty salesmen.

Having said that, it remains to be seen if they can grow now that they are trying. If I don't see revenue rising in the next 12 months or so, then that is something I will be at a loss to explain. I could accept growth in the form of clientbase, plain revenue... anything but I must see some results. A CEO sitting on his hands could be good, but an inactive salesforce is another matter.

http://www.investorvillage.com/mbthread.asp?mb=444&tid=9562963&showall=1

Unidentified Participant

Okay. I'm going to shift over to the enterprise and federal, which you said fastest growing, I think had a very good second-quarter in terms of the results. Can you talk about some of the drivers there? It may be helpful to preface that with, what's the breakdown? Are we more weighted towards the governments working here? Or is this more on the enterprise side that's kind of driving the growth we're seeing there?

Jeff Storey - Level 3 Communications - President and COO

So we've been very pleased with our government growth, but I'd say it's more weighted towards the enterprise, though we are pleased with the federal government growth that we've been seeing. The breakdown of why people buy from us, it's people that have unique needs -- either large capacities; they want to scale their network to large sizes; they want reliability and redundancy that others can't provide; latency requirements that others can't provide; data center connectivity. They buy from us, our large enterprise customers buy from us the same way smaller carriers buy from us. They typically want to tie together multiple locations with low latency, high capacity, very reliable routes, and they select us for those types of things. So, the cloud computing or data center consolidation, any of those things should help drive our business.
go_loe
Go_loe - 3 years ago
Batbeer2,

Do you own both bonds & equity(Berkowitz mix)? If the company goes down for any reason, you can get a valuable company debt free in reorg(equity holders wiped out)? I hear berkshire owns some bonds(10%). I bet Watsa owns some too since he owns much equity.
batbeer2
Batbeer2 premium member - 3 years ago
Just the equity.

The bonds could be very interesting, I agree. First I need to check with my broker if I can get them.
Ashish Gupta
Ashish Gupta - 3 years ago
I looked up on fidelity. Level 3 bonds do not look very cheap for a company with stock price in bankruptcy category. Bonds are yielding 11-12%.
batbeer2
Batbeer2 premium member - 3 years ago
Oh,

Please note I may write a bull case without owning the stock. That goes for shorts too.... For example, I'm not short VXX and I'm not long GENC. If you're curious about my holdings (and turnover) my US stocks are probably also listed in my (public) gurufocus portfolios.
Sivaram
Sivaram - 3 years ago


I looked up on fidelity. Level 3 bonds do not look very cheap for a company with stock price in bankruptcy category. Bonds are yielding 11-12%.


Probably because it is backed with strong assets. Anyone interested in bonds can get an idea from here. Rating around CCC... yield around 11%... trading around 80% of par value depending on the bond... several of the low-yielding ones are convertibles ones, which may interest some of you...

Overall, I'm not sold on this but good luck to Batbeer... (On an unrelated note, Batbeer, what are your thoughts on Nokia (NOK)? Have you ever looked at it?)
PIXARR
PIXARR - 3 years ago
Level 3's Debt Maturity Profile

I thought this was interesting, Level 3 has done a good job in extending their debt maturity schedule--looks like they have a few years of breathing room. The data is from a recent presentation by Jeff Storey, president and chief operating officer of Level 3, at the Goldman Sachs Global Investment Research Communacopia XIX Conference on Thursday, Sept. 23.

Highlights:

With the recent Convertible Sr. Notes Level 3's Pro forma Cash Balance is $574 million

Total Debt outstanding is about $6.4 billion

Weighted Cost of Debt 8.1%

$196 Million Due in 2011

$294 Million Due in 2012

$695 Million Due in 2013

$2930 Million Due in 2014

http://lvlt.client.shareholder.com/events.cfm

Speaker: Jeff Storey, President and COO

JNR
JNR - 3 years ago
Level3 finances are prudently managed - and it is not 'living off debt'. Level3's cash flow from operations (after the payment of interest) was $357 million and $413 million in 2009 and 2008. Investments in those years were $307 million and $321 million. So, they're money ahead. Long term debt at year end 2009 was $5.8 billion; at year end 2007 it stood at $6.8 billion. Tremendous upside IF revenues increase and margins hold. But, that's a big IF.
batbeer2
Batbeer2 premium member - 3 years ago
http://www.foxbusiness.com/markets/2010/10/04/level-ceo-lead-obama-committee-telecom-security/

Level 3 Communications Inc. (LVLT) said President Barack Obama has named Chief Executive James Q. Crowe to lead an advisory committee on telecommunications security and emergency preparedness.
batbeer2
Batbeer2 premium member - 3 years ago
Level 3 (LVLT) bids for Global Crossing (GLBC); both stocks spike. ST Telemedia, which owns 60 % of GLBC has agreed to vote its shares in favor of the transaction, subject to certain terms and conditions.

GLBC's assets have a replacement value of at least $11B. The transaction is valued at about $3B including debt.

On a pro forma basis and including the benefit of expected synergies, LVLT's ratio of net debt to EBITDA is expected to improve from 7x to 4.5x.

LVLT has $6B of NOLs. It hasn't gone through bankruptcy like most of the others, including GLBC. This acquisition means any future profits of the combined company are tax sheltered.

ST Telemedia will own about 25% of the combined company; it's no longer the controlling shareholder. The agreement is a vote of confidence in LVLT's management and long-term strategy.

As an owner of LVLT, I like it. The thesis is not affected and consolidation in this business is a good thing. They get to cut operating costs by mothballing redundant capacity. GLBC runs/ran its own US backbone on 24 strands of Qwest's physical network. That's now a redundant operating cost.

The combined company has better pricing power and retains the physical conduits and rights of way. It's those conduits that have the prohibitively high replacement cost !

http://www.fiercetelecom.com/story/level-3-acquire-global-crossing-scale-global-reach-video-service-capabiliti/2011-04-11?utm_medium=rss&utm_source=rss


P.S.

The list of tier 1 networks gets shorter and shorter; GLBC was on the list.

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