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.
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