M&A Goes to the Next Level

If you like to profit from mergers and acquisitions, consider investing in our cash-flow rich Personal Finance Growth portfolio stocks. 

Last week I discussed how Danone’s buyout offer for WhiteWave Foods was an example of the merger and acquisition activity that the Brexit vote will spawn as nervous executives in Europe look to buy American companies to reduce risk. As if on cue, one of our Personal Finance growth portfolio stocks, Level 3 Communications (NYSE: LVLT), shot up during the past week on renewed speculation that it may soon be acquired.

This isn’t the first time takeover rumors boosted Level 3. Last year Comcast briefly was thought to be pursuing Level 3, driving its share price above $54 in December before plunging below $42 two months later. But over the past two weeks LVLT’s share price has surged again, from less than $48 on June 27 to above $57 on July 13.

That quick 20% gain wasn’t spurred by a company press release or an analyst upgrade. In fact, the only news during that two week period was a downgrade to ‘sell’ by Zacks Investment Research. 

As for who may want to buy Level 3, Comcast is still in the running. But given the outcome of the Brexit vote, so too are many foreign companies that would want LVLT’s extensive Internet services business that generates U.S. dollars. Last year Level 3 posted more than $8 billion in total sales, with a gross profit of $3.9 billion for a profit margin of 41%. That kind of cash flow is attractive no matter what currency it is in.

That impressive cash flow is one reason why I added it to the Personal Finance growth portfolio last year after my IDEAL Stock Rating System flagged it as undervalued. Since going on an acquisition spree six years ago when it bought Global Crossing, Level 3 has increased its cash flow from operations nearly six-fold. It’s borrowed a lot to do so, and has used much of its excess cash flow to pay down that debt. But its balance sheet is now back in order, showing more than $1 billion of cash and a current ratio of 1.25, meaning it has 25% more short term assets than short term liabilities.

With a stock market value of $20 billion, one of its larger rivals could easily afford Level 3. By way of comparison, both Verizon and AT&T each have market values in excess of $200 billion. Comcast, also much bigger with a $162 billion value, has a current ratio of only 0.8, meaning adding LVLT’s assets and liabilities would actually improve its liquidity ratios.

Based on LVLT’s recent share price action, it appears the thinking is if Comcast doesn’t act soon to capture Level 3 then someone else will. That’s the same logic that compelled Danone to sweeten its bid for WhiteWave in the aftermath of the Brexit vote. Regardless of what happens with Level 3, expect to see many more American companies the subject of buyout rumors in the months to come.

Our Personal Finance Growth and Income portfolios currently hold dozens of stocks that should appeal to foreign buyers based on their solid fundamental and strong cash flow, and thanks to Brexit the world will soon be running to us with checkbooks in hand.