Level 3 Going Shopping

CEO James Crowe says Level 3 is looking to buy distressed competitors, as the telecom giant seeks new revenue to offset sluggish growth in core markets. With about $1 billion in cash, Level 3 has "lots of opportunities to make acquisitions like the ones we have already made," Level 3 Chief Executive James Crowe told a Goldman Sachs conference yesterday.

What kind of deals make sense? Crowe said the ideal acquisition target would offer "largely the same services and are in largely the same geographic area so we can take advantage of some synergies." That's likely to further fuel speculation that Level 3 may have renewed interest in the US operations of Cable & Wireless, which wants to sell or close the hosting operations it purchased from Exodus and Digital Island.

Cable & Wireless may have fewer options on the table, as British media are reporting that a buyout effort by the US management team is having trouble obtaining financing.

But does a Level 3 deal for C&W's American operations make sense? C&W's US hosting operation is losing money and faces substantial lease obligations on data centers. When it acquired Genuity earlier this year, Level 3 quickly unloaded Genuity's money-losing hosting operation and underused data centers, flipping them to Computer Sciences Corporation. It seems unlikely that Level 3 would suddenly have an interest in acquiring similar hosting assets from C&W.

But Wall Street may be disappointed if Level 3 doesn't buy something soon. Crowe has been talking about bottom-fishing for distressed assets ever since Warren Buffett invested with the company in mid-2002. There's been no shortage of targets, but Level 3's biggest telecom acquisition to date has been Genuity. The company has raised expectations of a deal, and now needs to deliver one or face second-guessing about opportunities missed.