Citi Thinks Level 3 Could Be Attractive Target For A Cable Company

Shares of Level 3 Communications, Inc. LVLT hit a new 52-week high of $57.59 and gained more than 4 percent on Wednesday after Benzinga Pro reported that an industry source said the company is exploring strategic alternatives, including a sale of itself.

Michael Rollins of Citi Research offered his own take.

Rollins stated Level 3 Communications remains his top-pick within the telecommunications operators given its financial flexibility, valuation, and strategic optionality.

Related Link: Level 3 Shares Spike After Benzinga Pro Reports Company Considering Strategic Alternatives

The analyst noted that shares of the company are trading at an approximate 10x multiple to his OIBDA estimate and approximate 11x multiple to his discretionary free cash flow estimate. He added that both of these multiples are "too cheap" given the company's "growth profile and deep strategic asset-mix of metro and long-haul fiber."

"We believe that LVLT's extensive enterprise presence could be attractive for a cable player looking to move up-market and accelerate its investment from the SMB segment into the enterprise market," the analyst wrote.

Rollins said he would "not dismiss the possibility" the company and Zayo Group Holdings Inc ZAYO consider a merger in which a joint entity would become a larger competitor for the enterprise market.

Rollins also expects Level 3 Communications will likely spend $1 billion in share repurchases in 2017 and a total of $7 billion through 2020.

Rollins rates Level 3 Communications' stock with a Buy rating and $66 price target.