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Ethernet services

Level 3 to Acquire tw telecom for $5.7B

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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