Marking more consolidation of the telecom services sector, Level 3 Communications announced Monday that it has struck a deal to acquire tw telecom in a stock-and-cash agreement valued at $5.64 billion, or $40.86 per share, based on market close as of June 13, 2014.
Under terms of the deal, tw telecom stockholders will receive $10 cash and 0.7 shares of Level 3 common stock for each share of tw telecom common stock that is owned at closing.
They said the combination of the Colorado-based companies will “create a stronger, more nimble, customer service-oriented competitor to meet customers' increasingly complex local, national and global communications needs.”
Level 3 said its customers will benefit from tw telecom’s metropolitan footprint and buildings connected to its network, while tw telecom’s customers will benefit from Level 3’s “local-to-global footprint,” with owned network and data centers in more than 60 countries and “significant” global subsea networks.
The deal will combine two major suppliers of Ethernet services in the U.S.. According to Vertical Systems Group’s latest leaderboard, tw telecom was the third-largest provider of Ethernet services at the end of 2013, trailing only AT&T and Verizon Communications. Level 3 was ninth on that list, behind Comcast, XO Communications, Cox Communications and Time Warner Cable.
"We believe this is a financially compelling and very strategic acquisition for Level 3 that will enhance our ability to continue to gain market share," Jeff Storey, president and CEO of Level 3, said in a statement. "The transaction further solidifies Level 3's position as a premier global communications provider to the enterprise, government and carrier market, combining tw telecom's extensive local operations and assets in North America with Level 3's global assets and capabilities.”
"The transaction with Level 3 provides the combined company with an enhanced competitive position, our customers with a broader product offering, and better opportunities for our employees as part of a larger company in an industry where scale is important to compete effectively against larger competitors," said Larissa Herda, chairman and CEO of tw telecom.
The combination is expected to provide $240 million of annualized synergies, with $200 million from Adjusted EBITDA savings and $40 million from capital expense savings, according to Level 3 EVP and CFO Sunit Patel.
For the twelve months ended March 31, 2014, the combined company had pro forma revenues of $7.9 billion, and adjusted EBITDA of $2.2 billion. The companies also estimate that the net present value of the potential synergies from the deal will be about $2 billion, expecting to realize 70% of adjusted EBITDA savings within 18 months after closing the deal. They also expect to incur $170 million of integration costs, with 60% coming from operating expenses and 40% from capital expenses.
As part of the transaction, Level 3 has received committed financing of $3 billion. Additionally, Level 3 and tw telecom have entered into a voting agreement with STT Crossing Ltd (a wholly owned subsidiary of Singapore Technologies Telemedia Pte Ltd), which owns approximately 23 percent of Level 3's outstanding stock.
The transaction is expected to close in the fourth quarter 2014, the companies said.
tw telecom was founded in 1993 as a joint venture between US West (now part of CenturyLink Communications) and Time Warner. tw telecom went public in May 1999, when it was known as Time Warner Communications, and was later renamed Time Warner Telecom Inc. The company rebranded as tw telecom inc. on July 1, 2008.
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