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Level 3 to Acquire tw telecom for $5.7B

Sarah Thomas

Level 3 has agreed to acquire Ethernet service provider tw telecom for $40.86 per share in a cash and stock deal worth $5.7 billion, the companies confirmed on Monday.

The move unites two of the top Ethernet service providers in the US into one powerhouse company.

Level 3 Communications Inc. (NYSE: LVLT), a national fiber optic network operator and content delivery company that provides transport services for Netflix Inc. (Nasdaq: NFLX) and Google (Nasdaq: GOOG), among others across the globe, is acquiring its rival services provider to strengthen its connection to its enterprise, government, and carrier customers in the US. Under CEO Jeff Storey, Level 3 has been more aggressively pursuing an enterprise services strategy. (See Level 3 Revs Its Enterprise Engine.)

"tw telecom's business model is directly aligned with Level 3's initiatives for growth, which include building managed solutions to meet customer needs through an advanced IP/optical network," Storey wrote in the official news release announcing the deal.

tw telecom operates its own fiber connections into buildings in 80 markets around the country, following its most recent expansion late last year. The company has recently established industry leadership in delivering Ethernet as an on-demand service. (See tw telecom Expands Market Footprint and tw telecom Changes CoS Dynamics.)

(UPDATE:) Current Analysis analyst Cindy Whelan notes that this is a good deal for Level 3 both financially and service-wise.

"The carriers have a complementary service focus, particularly for Ethernet and cloud services (i.e., Cloud Connect and eLynk)," she says, "and while I don't think this acquisition will add much for Level 3 in terms of new markets, it does deepen their metro fiber reach and brings them nearly 21,000 fiber-attached buildings, along tw telecom's base of enterprise and government customers."

Whelan says both carriers have been strongly emphasizing customer experience for a number of years and credits Level 3 with working hard "in streamlining internal and customer-facing processes recently, so I would not expect this to be change significantly if the acquisition closes."

Rumors have been swirling around a possible tw telecom acquisition for years now, with first CenturyLink Inc. (NYSE: CTL) and then Level 3 as the likely buyers.

Level 3's share price jumped by 1.75% to $44.86 in pre-market trading Monday morning once the deal was announced. tw telecom's stock gained 11.45% to reach $40.50 in pre-market trading.

The $5.7 billion valuation is a 12% premium over tw telecom inc. (Nasdaq: TWTC)'s Friday closing price of $36.34. Level 3 says it expects the deal to be accretive on a free cash flow per share basis after the first year following the transaction close.

Both companies will be at Light Reading's Big Telecom Event (BTE) in Chicago this week, so we will follow up with more reaction to the move during the week.

— Sarah Reedy, Senior Editor, Light Reading

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User Rank: Light Beer
6/16/2014 | 5:22:37 PM
I am wondering how much this purchase is reactionary to Zayo's recent growth. They're gobbling up the metro ethernet market right now (at least in my market).
User Rank: Light Sabre
6/16/2014 | 5:14:18 PM
Re: Can Level 3 do the sensible thing?
Usually these types of acquisitions depend on if cultural fit is a good one...

We'll see if these two assimilate or continue to operate with individual models. I personally don't know if consolidation is a particularly good thing in this sector. But we can only tell success looking backward, not forward. 
Mitch Wagner
Mitch Wagner,
User Rank: Lightning
6/16/2014 | 2:46:40 PM
Re: Can Level 3 do the sensible thing?
It sounds to me like this is a straightforward customer acquisition for Level 3. I'm not seeing assets here that tw telecom has that Level 3 wants. And if I'm reading this article right their footprint is similar, so Level 3 would not broaden its geographic reach.
User Rank: Blogger
6/16/2014 | 11:28:15 AM
Re: Can Level 3 do the sensible thing?
I shou;ld explain what I mean by operational model (which I guess could mean almost anything anyone wants it to).


Basically, it seems to me that tw telecom has been very clever in the way it has focuised on some of the detailed operational processes that provide it with a clearer view of its customers and the ability to be able to turn up new services more quickly, as explained and detailed in this article



What I am hoping is that Level 3 will not introduce new methodologies that impact that work -- and it's hard to see that bringing the 2 companies together will not necessitate the intergation of the IT systems and operations teams, so something somewhere will have to 'give'. 

Greg Scott
Greg Scott,
User Rank: Lightning
6/16/2014 | 11:07:19 AM
Re: Can Level 3 do the sensible thing?
What is the difference between the two  operational models?

User Rank: Blogger
6/16/2014 | 9:17:14 AM
Can Level 3 do the sensible thing?
Here's when we find out if the Level 3 management have their heads screwed on properly.... the vital component in this deal is not the phyical assets, it's the operational model. In my view, if Level 3 rolls over tw telecom's operational model and imposes its own, it will destroy the value.

That's how it looks from here, anyway....
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