When the rumors started late last week, I must say I didn't believe them. But this time the big one turned out to be real. Level 3 Communications has this morning announced a deal to acquire tw telecom.
The deal is for $10 per share in cash plus 0.7 shares of Level 3 stock, which puts the deal at about $40.86 per tw telecom share and $5.7B or so. tw telecom investors will own some 27% of the whole on a fully diluted basis. Level 3 has arranged for some $3B in financing to grease the wheels.
Given Level 3's increasing focus on the enterprise, this combination has been becoming more likely over the past few years as the potential wholesale/enterprise dissonance has faded. tw telecom specializes in the low to mid-sized enterprises, while Level 3 has been focuse on the mid-to-large size. Between the two they can take on all sectors.
Asset-wise, tw telecom has always had incredible depth but did lack the kind of intercity assets that Level 3 built years ago. Between the two of them, they should have more than 30,000 on-net buildings (make that 35,000 on-net buildings as per the call), structures, aggregation points, or whatever you like to call them, in virtually every major market in the US.
In terms of synergies, Level 3 expects to provide $240M in annualized synergies, with $40M of that coming from capital expenditures and $200M from operating expenses. Of the opex, 55% will come from netex, and 45% from opex, which is the reverse of their usual pattern. That probably reflects the fact that both companies are pretty lean right now and have relatively little overlap.
The integration will be a big one of course, but no bigger than prior efforts at least in monetary terms. It will be interesting to see what Level 3 does with tw telecom's dynamic bandwidth efforts aimed at the enterprise/cloud. The two seemed to have different philosophies on the subject.
I had expected Level 3's next move to be in Europe. However, the rise in the company's stock price and underlying fortunes came so quickly that it apparently made a previously unlikely deal into a real possibility in a hurry. What really surprises me though is that CenturyLink wasn't willing to outbid this price.
I'll update this article further as I understand more.
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