Level 3 Surges on $1.9 Billion Deal for Global Crossing

Level 3 to Acquire Global Crossing
The combination of Level 3 and Global Crossing will create a business with fiber-optic networks on three continents. Photographer: Matthew Staver/Bloomberg

Level 3 Communications Inc., the unprofitable provider of broadband services, jumped the most in five months after agreeing to buy Global Crossing Ltd. for about $1.9 billion.

Level 3, based in Broomfield, Colorado, will acquire Global Crossing in an all-stock transaction to expand its network over three continents and reduce expenses, the companies said in a statement today. The deal is worth $23.04 a share based on Level 3’s closing stock price on April 8, 56 percent more than Global Crossing’s share price that day. Jim Crowe, Level 3’s chief executive officer, will lead the merged entity.

The deal will combine two unprofitable companies with total revenue of $6.26 billion as of last year, and cut annualized capital spending by about $40 million, according to the statement. It will also help reduce the pressure on prices, which have declined by as much as 30 percent a year in the industry, said Donna Jaegers, an analyst at DA Davidson & Co.

“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.”

Level 3 rose 26 cents, or 18 percent, to $1.70 at 4 p.m. New York time in Nasdaq Stock Market trading, the biggest gain since November. The stock has climbed 73 percent this year. Global Crossing jumped $10.17, or 69 percent, to $24.97.

Global Crossing will give Level 3 fiber lines across the Pacific Ocean and in Latin America, and add to its capacity in the U.S. and Europe. The companies together will have their own networks in 50 countries and reach to more than 70 countries.

‘Something New’

“I don’t think it’s an exaggeration to say most other acquisitions are just about putting revenue together and cutting costs,” Crowe said in an interview. “This acquisition is about creating something new.”

Level 3 lost $622 million last year and has been unprofitable on an annual basis since 1998. Global Crossing, incorporated in Hamilton, Bermuda and operated out of Florham Park, New Jersey, had a net loss of $172 million in 2010 and last turned an annual profit in 2003, the year it emerged from bankruptcy.

Crowe, 61, was CEO of MFS Communications Co. when it was acquired by Bernard Ebbers and WorldCom Inc. for $15.5 billion more than a decade ago. Since taking the top job at Level 3 in 1998, he has completed at least 27 deals, according to Bloomberg data. The largest purchase completed until now was the $1.24 billion acquisition of TelCove Inc. in 2006.

Industry Trends

The industry has been working to combat a capacity glut since the technology bubble a decade ago led companies, including Global Crossing, to invest in fiber-optic networks, driving down prices and hurting profitability. Improvements in technology 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 the debt they took 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 value of today’s purchase is $3 billion, including the assumption of $1.1 billion in debt, the companies said.

Singapore Technologies Telemedia, which holds 60 percent of Global Crossing’s stock, will become the largest shareholder in the combined business, the companies said. ST Telemedia will get to pick about a quarter of the board members for the combined company, Crowe said. The transaction, which is subject to shareholder and regulatory approvals, is expected to close this year, the companies said.

XO Holdings

XO Holdings Inc. may be the next company to be acquired, Jaegers said. Activist investor Carl Icahn has taken over the company’s board and is pushing XO to sell, offering to buy the business for 70 cents a share in January through his company ACF Industries. XO said on April 8 that Chief Executive Officer Carl Grivner resigned to pursue other opportunities.

“We wanted to do something with Global Crossing for quite a while, and there wasn’t a No. 2 that was anywhere close,” Crowe said when asked whether he had considered buying XO.

XO jumped 5 cents, or 6.7 percent, to 80 cents, in over-the-counter trading. The stock has gained 16 percent this year.

“You have way too many players in long-haul,” said analyst Jaegers. “Global Crossing and XO were the two loosest cannons. With Global Crossing in Level 3’s hands and XO up for grabs with the CEO resigning, you’re starting to see steps that lead to more rational pricing.”

Deal Valuation

The Global Crossing purchase would be the third-largest of more than 170 acquisitions of U.S. telecommunication-services companies over the past three years, according to Bloomberg data. The acquirers paid a premium of 28 percent on average, compared with the target’s average price over 20 trading days before the deal’s announcement. Level 3 agreed to pay a premium of about 57 percent on that basis.

Since April 2008, nine acquirers paid a median 5.8 times their target’s earnings before interest, taxes, depreciation and amortization, compared with 3.6 times for Level 3, the data show.

Bank of America Corp.’s Merrill Lynch, Citigroup Inc. and Morgan Stanley advised Level 3. Goldman Sachs Group Inc. advised Global Crossing and Credit Suisse Group AG worked with ST Telemedia. Rothschild provided the fairness opinion to Level 3.


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