Level 3 Buys Broadwing for $1.4B
Level 3 will pay $8.18 in cash plus 1.3411 shares for each Broadwing share -- the equivalent of $741 million in cash and $649 million in stock and a 15 percent premium on Broadwing's closing price Monday.
Broadwing's share price rose to meet that premium, trading at $15.24 (up 14.77%) on the Nasdaq, while Level 3's stock rose $0.22 (4.14%) to $5.54.
Level 3 has announced a string of acquisitions in the last year and was known to be on the lookout for more. (See Level 3 Still Hungry for Fiber, Level 3 Takes TelCove, WilTel Sale Completed , Level 3 to Buy Progress, Level 3 Acquiring ICG, and Level 3 to Buy Looking Glass.)
Kevin O’Hara, president and COO of Level 3, told investors on a conference call that the company’s acquisitions fall into two categories -- backbone buys like WilTel Communications Group Inc. and complementary or growing companies such as Looking Glass Networks Inc. and TelCove Inc. “The Broadwing acquisition and integration will embody some of each,” he said, since Level 3 will save in operating costs by shifting all customer traffic onto a common network and benefit from the growth in Broadwing’s enterprise business.
CEO James Crowe said Broadwing “is a valuable addition” to its growing activity in the enterprise market, which accounts for 10 percent of its revenues. Broadwing’s $900 million annual revenues are evenly split between enterprise and wholesale customers, effectively doubling Level 3’s enterprise revenues.
“We think, given consolidation in the industry, given enterprises’ legitimate desire for alternatives, that it’s an important major market for Level 3. It’s not a side issue, it’s a core matter for us. We think the key to success in business markets is to have facilities in the metro that allow you to have a cost structure that’s more than competitive with others’ offerings.” That means having facilities that connect directly to customers’ locations, he said, adding: “Integration we have to do in order to get to the strategic focus on enterprise.”
Level 3 expects to rack up $110 million to $130 million in integration costs spread over 2007 and 2008 before making $300 million in annual adjusted OIBDA (operating income before depreciation and amortization) from the Broadwing business. CFO Sunit Patel said the carrier expects to yield over $200 million in annual cost savings from network and operating expenses after the integration is complete as well as small improvements in churn.
With the integration of Wiltel to complete and now the addition of Broadwing, Level 3’s shopping spree seems to be over for the time being. Crowe told investors: “Obviously if you found some deal that was simply irresistible by definition you’d have to at least look at it, but I’d say right now the bar is pretty high; in fact I’d say it’s very high. So we’re going to work hard to do what we’ve already taken on.”
Level 3 expects to close the deal in the first quarter of next year, subject to regulatory and shareholder approval.
— Nicole Willing, Reporter, Light Reading