By Lauren Pollock
The owner of the world's biggest telecom network is about to get
even bigger.
Long-haul Internet provider Level 3 Communications Inc. agreed
to acquire rival TW Telecom for about $5.7 billion in cash and
stock, merging the two companies' base of business customers as
consolidation sweeps the communications sector.
"Our primary competitors are very large companies, whether they
are incumbent telcos or cable companies," Level 3 Chief Executive
Jeff Storey told analysts during a conference call. "The
combination is completely aligned with that."
The transaction adds to a raft of giant telecom mergers this
year that could leave North America with fewer big service
providers. AT&T Inc. and Comcast Corp. have both proposed
multibillion-dollar takeovers that have blurred the lines between
legacy telephone networks, cable companies and satellite TV
providers.
This deal brings together the global reach of Level 3's Internet
backbone with the U.S. metropolitan focus of TW Telecom at a time
when traffic from streaming videos from Amazon.com Inc. and Netflix
Inc. to sensitive corporate data is increasing around the
globe.
Level 3 has spent more than $40 billion in the last 15 years
buying companies to string together 180,000 miles of fiber optic
cable bridging more than 60 countries, in an attempt to gain scale
to better compete with giant rivals like AT&T Inc. and Verizon
Communications Inc. The TW Telecom purchase represents Level 3's
biggest, eclipsing the $1.9 billion it spent on Global Crossing
Ltd. in 2011.
As its wholesale business shrinks, Level 3 has been seeking new
ways to bulk up its profitable segment serving corporate and
government customers. The backbone, serving its wholesale business,
while less profitable but much larger, could lure those customers
by offering seamless links to Asia, Europe and Latin America.
"Scale matters," said TW Telecom Chief Executive Larissa Herda,
who will step aside after the deal closes in the fourth quarter.
"It helps drive lower costs and our ability to compete with large
and growing competitors."
Still, Level 3 and TW Telecom together only hold about 6% of the
fixed corporate communications market in the U.S., according to
industry researcher International Data Corp. AT&T and Verizon,
on the other hand, together own nearly half.
The deal values TW Telecom at $40.86 a share, a 12% premium to
Friday's close. Shareholders will receive $10 cash and 0.7 share of
Level 3 for each share of TW Telecom. Level 3 will also take on
about $1.6 billion of debt through the deal.
Despite its acquisitions, Level 3 hasn't made an annual profit
since 1998 as the company faces plunging rates for long-distance
Internet traffic. Last year, Level 3 lost $109 million on $6.3
billion of revenue. Its stock, meanwhile, has roughly doubled after
years of belt-tightening may have set the company up for its
first-ever annual profit.
In the deal with TW Telecom, which is expected to close in the
fourth quarter, Level 3 expects to be able to cut costs by $2.2
billion.
Industry consolidation has made bandwidth prices more stable in
recent years, Level 3 Chief Financial Officer Sunit Patel said in
an interview, at least in the local markets where both companies
offer to carry customers' sensitive corporate data.
Big corporations tend to ask a single telecom company to link
their offices around the world, regardless of who owns the cables
connecting them. Those customer demands often force providers like
Level 3 to pay a competitor for connections into client's
buildings. More than half of this deal's expected cost savings
would stem from the combined company's ability to keep more network
traffic in-house, Mr. Patel said.
Originally a joint venture of Time Warner Inc. and U.S. West
started in 1993, TW Telecom made its public trading debut in 1999
as Time Warner Telecom Inc. Last year, activist investor Keith
Meister of Corvex Management LP revealed a big stake in TW Telecom
and said he thought the company was a likely takeover target,
citing its ability to profit from heavier data use as consumers
increase their use of mobile devices
TW Telecom last month reported improved quarterly revenue,
helped by a big increase in data and Internet revenue, but profits
declined on higher expenses.
The deal is subject to approval from the U.S. Federal
Communications Commission and state agencies, along with the
shareholders of both companies. STT Crossing Ltd.--a unit of
Singapore Technologies Telemedia Pte Ltd., which owns about 23% of
Level 3's outstanding stock--has already entered a voting agreement
with the companies.
Lauren Pollack contributed to this article.
Write to Drew FitzGerald at andrew.fitzgerald@wsj.com
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