Level 3 To Acquire Global Crossing


Network services provider Level 3 Communications plans to acquire competitor Global Crossing in an all-stock deal valued at $3 billion, including $1.1 billion in net debt.

The combined company will provide network transport, content delivery, data center, colocation and voice services, serving customers in more than 50 countries and with connections to more than 70 countries. Level 3 said Global Crossing will bring "important additions" to Level 3's service portfolio, including managed services, collaboration services and intercontinental virtual private networking capability.

Global Crossing shares shot up more than 70% to about $25.44 per share in morning trading, while Level 3's stock climbed about 20% to $1.73 per share. Under the terms of the agreement, Global Crossing shareholders will receive 16 shares of Level 3 common stock for each share of Global Crossing owned at closing.

"The complementary fit between the two companies' networks, service portfolios and customers is compelling," Level 3 CEO Jim Crowe said in announcing the deal Monday. "By leveraging the respective strengths and extensive reach of both companies, we are creating a highly efficient and more extensive global platform that is well-positioned to meet the local and international needs of our customers."

As backbone-services providers, Level 3 and Global Crossing are aligned in lobbying the Federal Communications Commission to regulate interconnection pricing of last-mile Internet service providers. Level 3 has accused Comcast of violating the FCC's network neutrality rules by demanding payment to deliver content such as streaming video from Netflix. Global Crossing weighed in with a February filing commenting that Comcast's actions show retail ISPs are "distorting" the economics of traditional peering relationships.

Level 3's proposed takeover of Global Crossing -- expected to close before the end of 2011, pending stockholder and regulatory approvals -- will result in annualized savings of approximately $300 million and annualized capital expenditure reduction of approximately $40 million, the companies said. Of the total expected synergies, about 39% are from network expense savings, about 49% from operating expense savings and about 12% are from reductions in capital expenditures.

As of Dec. 31, 2010, Level 3 had 5,500 employees and Global Crossing had 5,145.

The combined Level 3-Global Crossing would have had combined 2010 revenues of $6.26 billion and adjusted earnings before income tax, depreciation and amortization of $1.27 billion before synergies and $1.57 billion after expected synergies. Level 3 expects to incur approximately $200 million to $225 million of integration costs associated with this transaction.

Singapore Technologies Telemedia (ST Telemedia), Global Crossing's largest shareholder about a 60% ownership stake, has already approved the deal. Level 3, based in based in Broomfield, Colo., said it has received committed financing for $1.75 billion in connection with the planned acquisition.

Also Monday, Level 3 announced that it is adopting a stockholder rights plan designed to protect Level 3's federal Net Operating Losses (NOLs) from the effect of Internal Revenue Code Section 382, which can restrict the use of NOLs. According to the company, the Global Crossing deal would move Level 3 significantly closer to the 50% ownership change outlined in that IRS rule and increase the likelihood of a loss of Level 3's NOLs.

BofA Merrill Lynch, Citi and Morgan Stanley acted as advisors to Level 3, and Rothschild provided a fairness opinion. Willkie Farr & Gallagher LLP acted as legal counsel to Level 3. Goldman Sachs acted as financial advisor and Latham & Watkins acted as legal counsel to Global Crossing. Credit Suisse Securities (USA) LLC acted as financial advisor to ST Telemedia.

Level 3 and Global Crossing are partners on a transatlantic cable network. Level 3's European network is linked to its North American intercity network by leased capacity and by the Level 3 transatlantic cable system, which was completed pursuant to a co-build agreement announced in February 2000, whereby Global Crossing participated in the construction of, and obtained a 50% ownership interest in, the transatlantic fiber system.