TMCnet News

Broadwing Deal May Signal an End to Level 3's String of Acquisitions
[October 17, 2006]

Broadwing Deal May Signal an End to Level 3's String of Acquisitions


TMCnet Executive Editor
 

The wheeling and dealing at Level 3 Communications (News - Alert) could finally be coming to an end, company officials at the Internet backbone provider hinted on Tuesday.



 

Earlier today, Level 3 agreed to acquire Broadwing (News - Alert), the Austin, Texas-based optical networking service provider with an intercity fiber network footprint of 19,000 miles, for an aggregate purchase price of approximately $1.4 billion in cash and stock. The deal is just the latest in a string of acquisitions that has helped Level 3 transform itself and diversify its revenue base.


 

In June, Level 3 acquired Looking Glass Networks, a privately held facilities-based provider of metropolitan transport services , after creating a new metro services unit in May with the $1.24 billion acquisition of CLEC TelCove. Those deals come on the heels of Level 3’s billion-dollar shopping spree when it absorbed WilTel and its Vyvx subsidiary for nearly $700 million last year and Progress Telecom (News - Alert) for roughly $150 million as well as ICG for $163 million this year.

 

On a conference call with financial analysts, Level 3’s CEO Jim Crowe said his management team knows full well that more than 50 percent of all acquisitions historically destroy value for the acquiring company due to a number of factors including lofty premium prices or integration woes. And, while opportunities may still arise in the future, management now has enough on its plate.

 

“Whenever we're fully engaged, and I'd say we're pretty close at this point to being fully engaged, the hurdle or bar goes way, way up,” Crowe said during the Q&A session of the conference call.

 

But not all analysts are convinced that Level 3’s management team is done with its wheeling-and-dealing ways. “Maybe the largest mergers will slow but I think there will still be many more smaller mergers to come. They just won't capture the headlines,” said Jeff Kagan, noted telecom analyst.

 

Level 3’s acquisitions have historically fallen into one of two categories, explained Kevin O'Hara, president and chief operating officer of Level 3. While deals like WilTel and Genuity have fallen into the backbone category, others like TelCove and Looking Glass are more complementary in nature, enabling the company to expand from its carrier base.

 

“The Broadwing acquisition … will embody some of each,” O’Hara said.

 

Approximately half of Broadwing's $900 million in annual revenue comes from its wholesale business while the enterprise market makes up the remaining half. As a result of its acquisitions, Level 3 will generate about 10 percent of its revenue from the enterprise market, he said.

 

Despite all of its M&A dealings, Level 3 officials believe they won’t have any difficulties absorbing its latest acquisition. “We have completed the majority of integration efforts from our WilTel acquisition under budget and ahead of schedule. The integration activities for our more recent acquisitions are also on plan,” O'Hara said in a prepared statement.

 

As for the Broadwing deal, CFO Sunit Patel said merger integration costs will hit about $110 million to $130 million spread throughout 2008.

 

----

 

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.


[ Back To TMCnet.com's Homepage ]