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Contributors: Douglas McIntyre Jon C. Ogg

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Monday, October 09, 2006

Will Level 3 Have Any Fallout From a YouTube Merger?

Stock Tickers: LVLT, GOOG

One question has been swirling in my mind since all the rumors came out mentioning YouTube would be acquired by Google (GOOG): Would Level 3 (LVLT) get to keep all of the YouTube revenues it recently signed last month for carrying their bandwidth? As any low-priced most actives stock traders probably remember Level 3 (LVLT) enjoyed a pretty big run-up last month after it named YouTube as a bandwidth client. It only ran marginally (almost 4%) the day the news was announced and the day after, but then Jim Cramer on MAD MONEY came out saying this was a huge win for the stock as every fund manager was out looking for ways to play the YouTube craze.

The stock closed at $4.55 on September 13 before Cramer discussed this win, but then it ran the next date to $4.93 on 80 million shares. It had even closed as high as $5.46 on September 26 and had remained an active stock. Last week it closed down at $4.93 mid-week and finished out the week at $5.15.

Well, we wanted to know how LVLT would be affected by a potential acquisition of YouTube by Google. Since it was such a new deal it was possible that not everything had been finalized, and we wanted to track this down. We received a statement back from the company after inquiring:

“Level 3 policy is that we do not comment on rumored acquisitions. Regarding our contract with YouTube however, we do have an agreement in place, just as we do with other customers, and would not expect any dramatic changes over the course of that contract. Additionally, due to continued growth and recent acquisitions, Level 3 has a more diversified customer base than ever.”

Please understand that we aren't going to say with 100% certainty that there will be NO fallout, but the good news is that it appears to relatively no change. So there is an implied outcome here that there won't be a massive exodus away from the deal and there won't be a massive additional influx beyond what it was LVLT was expecting.

The company reports earnings on October 24, 2006 so we likely will not see any guidance for the coming quarters until after that. It is at least good for investors to know that the company does not expect any material change, and that means they likely feel there is at least more stability to their model. Analysts expect Q3 estimates to be almost $905 million revenues and EPS to show -$0.14. The street is still expecting LVLT to have negative EPS for both fiscal 2006 and fiscal 2007.

So for now it appears that the good news and the bad news are the same: no real change. We'll have a better idea of what the company is really thinking and what they are willing to signal in a couple weeks.

Jon C. Ogg
October 9, 2006

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