Fitch Ratings expects to assign a rating to Level 3
KEY RATING DRIVERS
--The TW Telecom, Inc. (TWTC) acquisition increases LVLT's scale and focus on high margin enterprise account revenues while increasing the company's overall competitive position and ability to capture incremental market share;
--The acquisition is clearly in line with LVLT's strategy to shift its revenue and customer focus to become a predominantly enterprise-focused entity.
--LVLT remains committed to operate within its 3x to 5x net leverage target. The enhanced scale and ability to generate meaningful free cash flow (FCF) resulting from the transaction reinforces Fitch's expectation for further strengthening of LVLT's credit profile.
--The company is poised to generate sustainable levels of FCF (defined as cash flow from operations less capital expenditures and dividends). Fitch anticipates LVLT FCF generation during 2014 will range between 4% and 4.5% of consolidated revenues on a stand-alone basis, growing to nearly 10% of revenues by year-end 2016 on a pro forma basis.
--The operating leverage inherent within LVLT's business model positions the company to expand both gross and EBITDA margins.
The TWTC acquisition is in line with LVLT's strategy to shift its revenue and customer focus to become a predominately enterprise-focused entity. TWTC's strong metropolitan network supports LVLT's overall strategy. Pro forma for the transaction LVLT's revenue from enterprise customers increases to 70% of total CNS revenue from 66%. From a regional perspective North America CNS revenue would increase to 78% of total CNS revenue, up from approximately 71%.
LVLT's network capabilities, in particular its strong metropolitan network, along with a broad product and service portfolio emphasizing IP-based infrastructure and managed services provide the company a solid base to grow its enterprise segment revenues. Fitch believes that revenue growth prospects within LVLT's CNS segment stand to benefit from the transition among enterprise customers from legacy time division multiplexing (TDM) communications infrastructure to Ethernet or IP VPN infrastructure based in internet protocol.
From a network standpoint the transaction combines a highly complementary footprint and will increase LVLT's scale of metro networks and broaden its overall product and service portfolio. The TWTC acquisition solidifies LVLT's metropolitan network position with the addition of 24,300 fiber route miles to LVLT's network. The transaction will create minimal network and customer overlap. LVLT indicates that there is less than a 10% overlap with TWTC's 21,000 on-net buildings providing LVLT with approximately 35,000 unique locations globally.
The investment in metropolitan facilities (which extend its on-network footprint and overall network depth) provides the company the foundation to derive strong operating leverage from its cost structure and network, enabling it to grow operating margins. Additionally, the company's improving revenue mix can further strengthen its operating leverage and contribute to higher gross and EBITDA margins.
LVLT leverage strengthened to 4.7x as of the LTM period ended
Based on the company's ability to realize cost synergies in past acquisitions, Fitch has a high degree of confidence the company will successfully realize the TWTC cost synergies. LVLT expects
Network expense reductions represent approximately 55% of the anticipated operating cost synergies. The remaining 45% of operating cost synergies will be derived from a combination of head-count and non-head count expenses. Non-head count expense synergies will be driven by the elimination of duplicate corporate costs. LVLT expects to capture 70% of the run-rate operating cost synergies within 18 months of closing. The company anticipates it will spend
The TWTC acquisition improves LVLT's ability to generate consistent levels of FCF. Fitch anticipates LVLT FCF generation during 2014 will range between 4% and 4.5% of consolidated revenues on a stand-alone basis before growing to nearly 10% of revenues by year-end 2016 on a pro forma basis. The company has generated approximately
Fitch believes that LVLT's liquidity position is adequate given the rating, and that overall financial flexibility is enhanced with positive FCF generation. The company's liquidity position is primarily supported by cash carried on its balance sheet, which as of
What Could Trigger a Positive Rating Action:
--Consolidated leverage maintained at 4x or lower;
--Consistent generation of positive FCF, with FCF-to-adjusted debt of 5% or greater;
--Positive operating momentum characterized by consistent core network services revenue growth and gross margin expansion.
What Could Trigger a Negative Rating Action:
--Weakening of LVLT's operating profile, as signaled by deteriorating margins and revenue erosion brought on by difficult economic conditions or competitive pressure;
--Discretionary management decisions including but not limited to execution of merger and acquisition activity that increases leverage beyond 5.5x in the absence of a credible de-leveraging plan.
Fitch affirmed the following ratings with a Positive Outlook:
--IDR at 'B+';
--Senior unsecured notes at 'B/RR5'.
--IDR at 'B+';
--Senior secured term loan at 'BB+/RR1';
--Senior unsecured notes at 'BB/RR2'.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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