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Mergers & acquisitions

GC Could Boost Level 3's Global Ambitions

Does the combination of two second-tier telecom players create a new global powerhouse? Level 3 Communications Inc. (NYSE: LVLT) CEO Jim Crowe thinks so, and that's a primary motivation behind his company's $3 billion acquisition of Global Crossing (Nasdaq: GLBC), announced this morning. (See Level 3 Buying Global Crossing and Level 3 to Buy Global Crossing .)

The combined entity would have approximately 100,000 intercity and 30,000 metro route miles on three continents, connected by 40,000 miles of global subsea connections, reaching 700 markets in 70 countries.

The deal would combine Level 3's global content delivery network (CDN) capabilities with Global Crossing's much larger international footprint and with its unique assets in one of the world's fastest-growing markets -- Latin America.

In North America, the biggest impact would be to give Global Crossing's enterprise and multinational customer base access to Level 3's metro networks. Given the growth of the video market, particularly over-the-top video, a broader footprint would be a major bright spot, and it's perhaps why Crowe is calling this deal "transformational" for both companies.

Brian Washburn, research director, network services, for Current Analysis , says the Global Crossing buy represents a chance for Level 3 to reverse the recent negative trends for its financial performance.

"All lines of Level 3 business are declining or stagnant and the net losses are not improving," Washburn says. "Their numbers are trending in the wrong direction. The Global Crossing acquisition is a good move -- because they get all the assets, and yes, assume some debt, in a stock swap. But more importantly, Level 3 gets a to-do project -- they will spend the next several months shaving costs out of their internal business to increase profitability and get the numbers heading in the right direction, even if overall top-line revenue remains stagnant."

Even assuming Global Crossing's roughly $1 billion in debt, Level 3 would get a better balance sheet and a significantly strengthened credit profile. The company said its ratio of total debt to adjusted EBIDTA would shrink to 5, from 7.6.

On the services side, Global Crossing adds cloud capabilities, more extensive government services expertise and a broader VPN portfolio to Level 3's enterprise and video content capabilities. (See GC Goes 'Network-Centric' for the Cloud.)

Good fit
Washburn sees the service portfolios fitting together with relative ease, saying the companies should be able to connect their Ethernet service fabrics easily and that Global Crossing's MPLS VPN portfolio already offers a high degree of interconnectivity. Both companies have video operations, based on acquisition, that will need to be linked (or cut loose). On the CDN side, Global Crossing has some deals in place already that may take a little longer to untangle, he adds. (See GC Enhances CDN With Limelight Acceleration and Global Crossing Buys Video Provider.)

So while the analyst call to discuss the deal was drenched in the usual discussion of cost synergies, Crowe was most excited about the new sales possibilities for both companies, given the greater reach of their networks. Global Crossing would provide 33,000 fiber route miles outside the U.S. that Level 3 could sell to its global customers, while Level 3 would offer more metro connections for Global Crossing's North American customers.

"What we've all been trying to do is get more deals in front of more customers, and the combined set of assets with many more [sales] people touching customers will accomplish that," Crowe said.

There will be cost savings, and job cuts will be a big part of that, at least in the administrative area, but Crowe says the combined company will retain both firms' sales forces and hire more sales people as well.

Analysts generally view the merger as a logical extension of the industry's ongoing consolidation. Donna Jaegers of D.A. Davidson in Denver told Bloomberg, "This is what the telecom industry has needed for some time. There are way too many players.

And it's no big surprise -- Global Crossing had admitted the need for further mergers to gain the scale needed to compete. The company had planned some major network investments in the U.S., which may now well be on hold. (See Global Crossing: Buying or Selling? Maybe Both! and Global Crossing Preps Major US Upgrade.) Crowe says Level 3 wouldn't face the kind of post-acquisition trauma that plagued its acquisitions of Telcove and Broadwing earlier this decade, because it wouldn't be absorbing local facilities, only combining IP transport networks. Engineering teams would be looking at the best facilities to use from the combined entity and moving quickly to achieve the cost synergies promised in the merger deal.

Level 3 execs would retain the top spots at the new company.

For more
You can check out Level 3's extensive history of buying other companies:

&mdash:Carol Wilson, Chief Editor, Events, Light Reading

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