Level 3 Acquires TelCove, Forms New Metro Services Unit

As a clear indication that its recent string of acquisitions show no signs of abating, Level 3 Communications (News - Alert) on Monday agreed to acquire privately held TelCove, a facilities-based competitive local exchange carrier (CLEC) in Pennsylvania , for approximately $1.24 billion. 

The latest deal comes on the heels of Internet backbone provider’s billion-dollar shopping spree when it absorbed WilTel and its Vyvx subsidiary for nearly $700 million last year and Progress Telecom for roughly $150 million as well as ICG for $163 million already this year.

As a result of the national footprint created by Progress, ICG and TelCove acquisitions, Level 3 today also announced the formation of a new metro services unit, a CLEC business that is expected to rank among the nation’s largest carriers with approximately $700 million in annualized revenue.

“The competitive local exchange business today and the set of services sold today looks largely the way it did 10 or 15 years ago…the same set of services…circuit-based...voice is circuit-based...traditional set of private line, wavelength services. I think we can add a lot of value by introducing the kind of IP-oriented services that has distinguished Level 3 from the day we started,” Level 3 CEO Jim Crowe said on a conference call with analysts.

With annual revenues of about $390 million and Adjusted OIBDA of about $130 million, TelCove’s business will make up the core of the new metro services unit. The acquisition consists of $637 million in shares of Level 3 common stock, $445 million in cash and $155.5 million in the assumption of debt. TelCove has more than 22,000 local and long haul route miles serving 70 markets across the eastern , with approximately 4,000 buildings on-net.

“As a result of the three transactions and including the organic Level 3 facilities, Level 3 will end up with approximately 5,200 on-net buildings in 110 markets. This acquisition further enhances our position as an end-to-end provider of communication services. And because of the scale of the TelCove business, it represents a great platform for Level 3 to use for our national metro business,” Kevin O'Hara, President and COO, said during a conference call.

But despite the potential stock dilution for all of the M&A deals as well as the assumption of additional debt on the company’s balance sheets, shares of Level 3 have climbed 66 percent in the last two months. And, with $670 million in cash still left in its war chest, there are signs that Level 3’s M&A wheeling-and-dealings aren’t done.

“It is not the first and will not likely be the last deal Level 3 does. Telecom as an industry is in the middle of a hot merger and acquisition period,” explained telecom analyst Jeff Kagan. “This is one of many telecom deals that we will see this year. The outlook for the telecom industry continues to look healthy as the industry transforms itself.”

In fact, Crowe said the company will “remain careful and cautious” but declined to rule out the possibility that more deals will come down the pike – instead focusing on O’Hara and his team’s ability to successful integrate the string of recent acquisitions.

“This is a platform into which other acquisitions may be integrated,” Crowe said, referring to the new metro services unit.

Level 3 expects TelCove’s integration costs will amount to approximately $75 million, of which $25 million will be in operating expenses and $50 million in capital expenditures. Most of the integration expenses will be incurred in 2007. The deal is expected to close in the third quarter.

As part of the transaction, Level 3 will be acquiring over 300 LMDS and 39 GHz licenses covering 90 percent of the population of the U.S. (LMDS is a fixed wireless technology that stands for Local Multipoint Distribution Services.)

During this morning’s call, Crowe said Level 3 intends to take a “hard look” at the wireless spectrum, signaling it might make a decision to divest the assets down the road.

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Robert Liu is Executive Editor at TMCnet. Previously, he was Executive Editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg. For more articles, please visit Robert Liu's columnist page.