Why Level 3 bought 360 Networks Biz?

360 Networks, one of the big broadband flameouts that retrenched and came back from the dead, has been limping along, hoping for better times. But today it decided that enough is enough, and called it quits when it comes to long haul business. It is going to sell is long haul business to Level 3 Communications. At first blush, it might seem like industry consolidation.

Dig deeper, and well think creative accounting. So this is how it goes. 360 bought Dynergy Inc’s long haul business in 2002. Dynegy had purchased fiber from Level 3 under a 20-year IRU in October 2000. In other words, 360 got stuck with that IRU. By acquiring 360’s long haul business, we have come full circle. In other words, the IRU has been cancelled. In other words, Level 3 bough back the capacity it sold in the first place. When they did the original deal with Dynegy back in 2000, they got paid $86 million. Now with this deal, Level 3 can recognize that non-cash revenue. Adding a near term oomph to a degrading balance sheet?

Reflections on Equity Research: Assume 5 years of revenue recognition 4.3*5 = $21.5, so theres is 86-21.5 = $64.5 deferred revenue on Level 3’s balance sheet just prior to Level 3 acquisition of 360. This erases $64.5m in liabilties. To offset this, Level 3 must recognize the $64.5m as revenue. Also, the reduction in liabilties may (or may not) help Level 3 with some some credit covenants.

Press release

MCI on a slow road to nowhere

For past week or so I have watched with a degree of bemusement, the punishment being doled out to AT&T. Having pretty much lost the UNE-P battle, the company was forced to reduce its revenue and earnings estimates. Now it is being said that Moody’s will downgrade nearly $11.5 billion of its debt. While this is not good news for Ma Bell, this is worse news for MCI. The company is just a timebomb waiting to explode – though you could not detect that from $14 a share price, which ironically is the same price AT&T shares are trading at.

Businessweek reports that the company had racked up “$388 million first-quarter loss and faces declining revenues in most lines of business.”

But they’re not. MCI’s sales of Internet access to businesses — the company’s core customer base — fell a steep 27.8% in the first quarter, to $465 million, while archrival AT&T’s (T ) Internet revenues rose 5.9% in the same period, to $471 million. Overall, MCI’s business Internet sales, which account for about 13% of total revenues, are expected to decline 18% this year, to $1.8 billion, while overall revenue contracts by 14%, to $21 billion, according to analyst Patrick Comack of Guzman & Co. in Miami.

It is going to be worse that that I am afraid. At this point you can buy one megabit per second bandwidth for about $50 a month – and that is retail. Think about the wholesale prices where MCI competes with equally desparate players such as Global Crossing. My report on Global Crossing from earlier today pretty much said so!

CSFB analyst Ido Cohen believes that the MCI and AT&T would be locked in a bitter price war (Read Let the price wards begin!) which is going to cause a havoc in the business.

MCI has limited ability to respond to what we now believe will be a longer-term price war waged with AT&T. Given the extended timeframe of the price war, we also believe any potential M&A interest will be delayed until visibility improves.

Cohen estimates that MCI will have 20,000 VoIP subscribers in 2004 and 400,000 in 2005, not enought perhaps to make up for the loss of UNE-P business. The bottomline on MCI or as I like to call it – Massively Corrupt Institution – that it will die sooner or later. By allowing WorldCon to get away with “fiscal murder” US government did us no favor. It bought into the UUNet hype and cut WorldCon unncessary slack. It allowed folks like Carlos Slim and a few others to speculate and play around with the stock. I fear the small investors who have bought into this crap again are going to get hurt. MCI is like a terminal cancer patient with rotting kidneys. Why give it a transplant?