Rumors had been swirling for several days, but now it is official. Level 3 Communications (NYSE:LVLT, news, filings) is buying glbc for roughly $3.0B! It’s a stock deal, with Global Crossing shareholders receiving 16 LVLT shares for every GLBC share they hold, which works out to $23.04 per share at the moment – a nice premium. That means Singapore Technologies and Telemedia will be joining Level 3’s other major investors rather than cashing out. Level 3 will also assume $1.1B in debt. Over the past three years, I have speculated at length about the merger of these two networks. It has always made a tremendous amount of sense strategically for them to combine. Why? Where Level 3 and Global Crossing overlap (the USA and Europe for wholesale) they would have tremendous synergies in the hundreds of millions of dollars annually. Where they do not (large enterprise, UK, and South America), their assets and product lines are highly complementary. Following the deal, Level 3 will have intercity, metro, and datacenter depth on three continents.
Both companies have underlying strategic needs that this deal fills. Level 3 needs greater scale to bear the load of its debt while maintaining a growth footing. Global Crossing needs US and continental European metro access to boost its margins, and for two years now has been quite open about the benefits of consolidation. That these two eventually managed to agree on a price is not nearly as surprising as how long it has taken. I think it would have happened years ago, but for the time it took to clean up Level 3’s previous integration disaster and the subsequent freezing of the credit markets.
Pro forma, Level 3 and Global Crossing had $6.26B in revenues and $1.27B in EBITDA for 2011. Level 3 forecasts synergies to come in at $300M in annualized costs plus $40M in reduced capex needs. Of the cost savings, 39% are expected to come from the netex side, and 49% will be from opex, with the remaining 12% from capex. It will take a while to put those savings together though. I’m sure we will hear much more about the integration plans, timing, and expectations on the call this morning.
As obvious as the combination has been from a high level strategic viewpoint, the fact that plenty of those synergies to be derived will come out of the hides of real people. Real people who read Telecom Ramblings in many cases. So while it could help bring longer term stability to a substantial segment of the competitive fiber, IP, and data sectors, it will probably bring instability to some readers’ families a few quarters from now. But given the growing health of the sector overall and the promise of steady and strong demand from the video revolution, hopefully there will be opportunities available when the time comes. In the long run, this deal stands to bring stability to the sector as the combined company will be on much more solid footing.
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