Still not done with its buying spree, Level 3 Communications Inc. (NYSE: LVLT) this morning announced a $1.2 billion deal to pick up TelCove Inc. , its biggest move since last year's pickup of WilTel Communications Group Inc.

The deal, expected to close during the third quarter, has Level 3 paying $637 million worth of shares and $445 million in cash while assuming $155.5 million of TelCove's debt. (See Level 3 Takes TelCove.)

Formerly a piece of cable provider Adelphia Communications , TelCove boasts 22,000 miles of fiber, about half of it in intercity rings around the eastern United States. The other half sits in various metro markets, and it's there that TelCove aimed its 10-Gbit/s Ethernet services, launched last year. (See TelCove Offers 10-Gig Ethernet.)

TelCove also brings in 300 wireless licenses, for LMDS and the 39 GHz range, covering about 90 percent of the U.S. population.

Investors blessed the deal, sending Level 3 stock up 26 cents (4.8%) to $5.66 by late afternoon today.

Level 3 has been a shopaholic since picking up WilTel last year. That deal -- for roughly $1 billion in cash and stock, based on Friday's closing price -- was followed by the $137 million pickup of Progress Telecom LLC in Florida and a $163 million deal for Colorado-based ICG Communications Inc. (Nasdaq/Frankfurt: ICGX).

All this dealing could accelerate Level 3's climb back to positive cashflow, executives say. TelCove would add annual revenues of at least $380 million, and its operating income before depreciation and amortization should exceed $125 million this year, according to Level 3.

For its first quarter, which ended March 31, Level 3 reported losses of $168 million, or 20 cents per share, on revenues of $1.27 billion, compared with losses of $169 million, or 24 cents per share, on revenues of $944 million for the previous quarter. (See Level 3 Reports Q1.)

"I think one would be hard-pressed to find a better acquisition target with substantial scale than TelCove," writes Heavy Reading senior analyst Stan Hubbard in an email to Light Reading. "I’ve been impressed by TelCove’s focus on Ethernet services and its strong double-digit growth in Ethernet sales in 2005. Combine this with the Ethernet-related expertise from the former WilTel side of Level 3 and you’re going to see more good things happening on this front. Customers looking to set up Ethernet connections in more locations should be pleased by this move."

TelCove has reach. Its network covers a good swath of the eastern United States, reaching into many of the Tier 2 markets that have "fewer major competitors and represent new growth opportunities," Hubbard notes. That could be key in letting Level 3 offer Ethernet services, as availability has been a problem for some potential Ethernet customers. (See Ethernet Expo: Shop 'Til You Drop.)

Because TelCove serves enterprises, it's natural to wonder if Level 3 could end up competing with the carriers that have been its traditional customers. But Level 3 executives don't see a problem there.

"I do not believe it causes any channel conflict. The industry has both competed with and cooperated [with carriers] for many, many years," CEO James Crowe told analysts on a conference call today. Crowe pointed out that even before, Level 3 had sold to some entities that could be considered enterprises but that had the "bandwidth intensity" of a carrier -- Sony Corp. (NYSE: SNE), for instance.

TelCove's services would carry the Level 3 brand name after the acquisition. That seems natural, considering TelCove has been through more name changes than Diddly, or whatever the heck he calls himself these days. TelCove started in 1991 as an Adelphia division named Hyperion, then became Adelphia Business Solutions (ABS) after going public in 1998. ABS filed for bankruptcy protection in 2002 and changed names to TelCove after restructuring.

Separately today, Level 3 created a metro business services unit that will combine the metro facets of ICG, Progress, TelCove (which would provide the biggest chunk), and Level 3 -- pending the completion of the ICG and TelCove deals, of course. This unit should have annual revenues of about $700 million, according to Level 3 officials.

— Craig Matsumoto, Senior Editor, Light Reading