Level 3 Buys Broadwing for $1.4B

Fiber-hungry carrier Level 3 Communications Inc. (NYSE: LVLT) has gobbled up yet another network, this time acquiring Broadwing Corp. (Nasdaq: BWNG) for $1.39 billion in cash and stock. (See Level 3 Acquires Broadwing.)

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

IPforEverything 12/5/2012 | 3:37:27 AM
re: Level 3 Buys Broadwing for $1.4B It's a bit odd to start the article with "Fiber-hungry carrier," when Level 3 said that most of the long haul fiber is redundant. It will probably be decommissioned in favor of Level 3's existing network. Although Level 3 usually keeps some routes that it didn't have, generally when they buy a national network, they generally move the traffic on to their existing network, turn it off most of what they just bought. They save lots in op-ex this way.
googol_byte 12/5/2012 | 3:37:25 AM
re: Level 3 Buys Broadwing for $1.4B I don't have the patience to do the math right now, but it appears to me that the real winner in all of this is the new CEO, Mr. Courter. He stands to make over $5M from this deal, having served a grand total of 78 days with the company. Not bad...


Pete Baldwin 12/5/2012 | 3:37:22 AM
re: Level 3 Buys Broadwing for $1.4B Although Level 3 usually keeps some routes that it didn't have, generally when they buy a national network, they generally move the traffic on to their existing network, turn it off most of what they just bought.

Wonder what happens to those six Corvis switches in the Broadwing network, then.
Metastablestate 12/5/2012 | 3:37:21 AM
re: Level 3 Buys Broadwing for $1.4B One of the perpetual mis-conceptions about Corvis was that it was an "optical switch manufacturer". They did design and build the switches in the Broadwing network, but that is a small piece of what Corvis did. They also developed all the line amps, the transmitter/receiver cards, the Tx/Rx nodes, the control software, etc. etc..

Basically Corvis was an end-to-end ULH link developer/manufacturer that happened to also make all-optical switches. The business model obviously didn't pan out, but the hardware worked great, easily hit the reach numbers that were quoted, and demonstrated "point and click" wavelength level provisioning before the carriers even know they needed it.

All this info was available on the website, but people couldn't see past the optical switch. Given that these may be the last Lightreading posts ever about Corvis, I felt I had to chime in.

Is Level3 going to keep this gear going? It's already installed and running. However, given the limited future technical support they're going to get from the remaining Corvis engineers that were ported over to Infinera, I imagine there are plans to decommission the 6 switches, as well as the hundreds of line amps and line cards.

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