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Level 3 Acquiring Global Crossing in $3B Stock Deal

Level 3 Communications said it would acquire Global Crossing for about $3 billion in stock, which includes assumption of about $1.1 billion in debt. Level 3, a telecom infrastructure provider, runs data centers and serves Internet Protocol-based networks and Ethernet services.

The combined network would serve a worldwide customer set with owned network in more than 50 countries and connections to more than 70 countries.

[Here, Network World covers this as the latest blockbuster in telecom.]

On a pro forma basis, the combined company would have had 2010 revenues of $6.26 billion, with combined 2010 adjusted EBITDA of $1.27 billion. After accounting for synergies, EBITDA would have risen to $1.57 billion, the companies said.

Terms call for Global Crossing holders to receive 16 shares of Level 3 common for each Globe Crossing common or preferred share is owned when the deal closes. Based on April 8 closing prices the transaction is worth $23.04 a share, or a total of about $3 billion, after including assumption of approximately $1.1 billion of net debt.

Less Pressure on Prices

The transaction would help reduce the pressure on prices, which have declined by as much as 30% a year in the industry, Donna Jaegers, an analyst at DA Davidson & Co., told Bloomberg News. "This is what telecom has needed for a long time," said Denver-based Jaegers, who recommends buying both stocks. "You have way too many players."

She added that the industry has been working to combat a capacity glut since Global Crossing and others invested in fiber-optic networks during the technology bubble a decade ago. Since then, technological improvements for sending traffic over the networks have increased the capacity and performance of the fiber, exacerbating the problem, Jaegers said. Both companies have struggled with debt taken on to build their networks. Global Crossing filed for bankruptcy in January 2002, the largest for a telecommunications company at the time. Level 3 avoided bankruptcy the same year with the help of billionaire Warren Buffett, who invested $500 million in the company with two partners.

The transaction will create a company with a unique capability to meet local, national and global customer requirements in a wide range of markets. By combining the strengths of each company, the new entity will offer enterprise, government, wholesale, content, and web-based customers a comprehensive portfolio of end-to-end data, video and voice solutions.

'Complementary Fit'

Jim Crowe, chief executive officer of Level 3, said the "complementary fit between the two companies' networks, service portfolios and customers is compelling." He called the combined company "a highly efficient and more extensive global platform that is well-positioned to meet the local and international needs of our customers."

"This transaction will provide Global Crossing shareholders with an attractive premium and The combined service capabilities, extensive network assets and talented employees of the two companies will create a stronger global communications competitor with compelling offerings in the marketplace," said Crowe.

John Legere, Global Crossing CEO said his holders will get "significant participation in the upside potential of a leading communications company with industry-leading scale and capabilities."

"We're looking forward to welcoming Singapore Technologies Telemedia, Global Crossing's largest shareholder, as a significant investor," said Crowe. "They are exceptionally sophisticated managers, with holdings in telecommunications and information companies in a number of countries. They know the technology and they know the industry. The breadth of their communications experience and their knowledge of international markets will be a great asset to us."

Singapore Tech Agrees

Lee Theng Kiat, president and CEO of Singapore Technologies Telemedia, the largest holder of Global Crossing, approved the deal as "an important milestone for both Global Crossing and Level 3, and a value-creating proposition for all stakeholders."

In the Level 3 and Global Crossing's assessment of the transaction, they said it is expected to create annualized adjusted EBITDA synergies of about $300 million and capital expenditure reductions of about $40 million. Level 3 expects to realize about two-thirds of the run rate adjusted EBITDA synergies within 18 months of closing, it said, and it estimated that the net present value of the potential synergies would approximate $2.5 billion. About 39% of total expected synergies are from network expense savings, and about 49% from operating expense savings, with the remaining 12% from reductions in capital expenditures.

"The company expects to incur approximately $200 to $225 million of integration costs associated with this transaction," Level 3 said, with about 55% of the costs from operating expenses, and 45% from capital expenditures to support integration activities.

The companies expect the deal to close by the end of the year. The acquisition is subject to regulatory approval, including possible reviews by the U.S. Department of Justice and the U.S. Federal Communications Commission.


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