Level 3 Communications announced Tuesday it is purchasing industry peer Broadwing Corp. for $1.47 billion in cash and stock, a move lauded by analysts and welcomed by investors.
The deal is the largest in a recent string for Broomfield-based Level 3, the fiber-optic communications network operator that has bought five other companies in the past year.
Four major independent fiber-optic network operators remain: Level 3, Global Crossing, XO Communications and Savvis. Phone giants Qwest, AT&T and Verizon also have their own networks.
Analysts said industry consolidation will help drive up profit margins. Investors showed approval of the deal Tuesday by sending Level 3’s stock up 70 cents, or 13 percent. The stock closed at a 52-week high of $6.02.
The company didn’t say Tuesday how many job cuts would result from the integration. Broadwing employs about 1,600 and Level 3 about 5,800.
“There’s a tremendous amount of duplicative costs between the two businesses,” said Level 3 president Kevin O’Hara.
Level 3 expects to reap cost savings of $200 million annually from synergies.
“This is a pretty good acquisition for Level 3,” said Greg Mesniaeff, a telecommunications analyst with Needham & Co. in New York. “It effectively doubles the size of their enterprise business.”
Level 3 owns thousands of miles of high-capacity fiber that carries Internet traffic and long-distance phone calls. Enterprise – or large business – customers account for 10 percent of revenues. The company is expanding that amount with acquisitions.
The other 90 percent of revenues come from wholesale customers such as small phone companies that resell the service. That revenue sector includes bandwidth hogs such as YouTube.com and MySpace.com, which are Level 3 customers.
Broadwing, based in Austin, Texas, generates 50 percent of its $900 million in annual revenues from enterprise customers.
The deal “gives Level 3 a good national sales force for the enterprise market,” said Donna Jaegers, an analyst with Janco Partners. “This should help Level 3 grow more on the enterprise side than they could’ve before.”
Level 3 will pay $8.18 in cash and roughly 1.34 shares of Level 3 common stock for each share of Broadwing. In total, Level 3 expects to pay $744 million in cash and issue 122 million new shares valued at $734 million based on Tuesday’s close. Broadwing’s shares rose $2.62, or 20 percent, to close at $15.90 on Tuesday.
“The acquisition of Broadwing is consistent with both the Level 3 wholesale market strategy as well as our more recent entry into the enterprise market,” Level 3 chief executive James Crowe said in a statement.
The deal is expected to close during the first quarter of 2007. Level 3 said it will spend $110 million to $130 million on the integration process, which could take up to 18 months after the deal closes.
As of June 30, Level 3 had $1.4 billion in cash and equivalents.
Over the past year, Level 3 has spent more than $2 billion in cash and stock on five other companies. Analysts don’t expect another acquisition any time soon.
“We have a lot of things on our plate today,” O’Hara said. “We’re not saying no, but we’re saying the bar that we would have to get over is pretty high.”
Staff writer Andy Vuong can be reached at 303-954-1209 or avuong@denverpost.com.
