Level 3 Agrees to Buy TW Telecom in $5.7 Billion Deal

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Level 3 Communications Inc., which helps route traffic across the Web, agreed to buy TW Telecom Inc. in a deal valued at about $5.7 billion to gain a direct connection to business customers.

TW Telecom shareholders will receive stock and cash valued at $40.86 per share, the companies said today in a statement. That’s a 12 percent premium to TW Telecom’s closing price last week. Including $1.6 billion of net debt, the deal is valued at $7.3 billion.

Level 3 is one of the largest content delivery companies used by Internet services including Netflix Inc. and Google Inc. TW Telecom provides phone and data service to mostly business customers with communications and Internet access. By adding TW Telecom, Level 3 will get direct access to large- and medium-sized businesses, removing a third party. The purchase will also let Level 3 own more network capacity in cities with the heaviest traffic and give it more control over pricing.

“Bringing them together is like combining an airline with a limo service,” said Roger Entner, an analyst with Recon Analytics in Dedham, Massachusetts. “It’s a very complementary match. Both companies focus on different parts of the business and it makes a lot of sense to put it together.”

TW Telecom stockholders will receive $10 in cash and 0.7 share of Level 3 for each share of TW Telecom. After the deal closes, TW Telecom investors will own about 27 percent of the company on a fully diluted basis.

Regulatory Approval

Shares of TW Telecom climbed 7.3 percent to $38.99 at the close of trading today in New York. Level 3 fell 4.1 percent to $42.30.

TW Telecom, based in Littleton, Colorado, had already gained 19 percent this year through last week, including a 12 percent jump on June 13 after BrightWire reported that Level 3 had intensified takeover talks with TW Telecom.

The transaction, subject to approval by shareholders of both companies as well as regulators, is expected to close in the fourth quarter. Level 3’s largest shareholder -- STT Crossing Ltd., a wholly owned subsidiary of Singapore Technologies Telemedia Pte Ltd. -- has agreed to vote its 23 percent stake in favor of the deal, according to today’s statement.

Level 3, which is based in Broomfield, Colorado, said it has already received committed financing of $3 billion.

U.S. Sales

The companies said that the combination will enable higher quality and more reliable Internet service for business customers across North America. Last year, Level 3 generated about 63 percent of its revenue in North America, while all of TW Telecom’s sales comes from the U.S.

“This is really a good deal for both companies,” said Andrew Hamerling, a money manager with Wavelength Asset Management LLC. Hamerling doesn’t own shares of either Level 3 or TW Telecom. “It gets Level 3 closer to their customers. It’s a natural progression.”

The combined company would have had $114 million in net income and $7.9 billion in revenue for the 12 months ended March 31, 2014.

“The transaction further solidifies Level 3’s position as a premier global communications provider to the enterprise, government and carrier market, combining tw telecom’s extensive local operations and assets in North America with Level 3’s global assets and capabilities,” Jeff Storey, chief executive officer of Level 3, said in the statement.

Debt Load

The entity will also have about $11.5 billion in debt and $431 million in cash. Level 3 is estimating that synergies from the deal will help reduce its ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization to 4.5 from 4.6.

The companies are estimating the deal will create $240 million in annual savings, including $40 million from capital expenses.

Accepting stock for part of the deal shows faith in the combined company, TW Telecom CEO Larissa Herda said on a conference call today. Herda plans to step down after the deal closes.

Created two decades ago as a joint venture of U.S. West and Time Warner Inc., TW Telecom went public in 1999 under the name Time Warner Telecom Inc. The company provides data networking, voice and other telecom services to corporate and government customers in 75 U.S. metropolitan markets, according to TW Telecom’s latest annual report. Level 3 will also gain access to the company’s more than 30,000 miles of fiber-optic lines connecting to 20,255 buildings.

Citigroup Inc. and Bank of America Corp. served as financial advisers for Level 3, while Willkie Farr & Gallagher LLP provided legal counsel. TW Telecom used Evercore Partners Inc. as its financial adviser and Wachtell, Lipton, Rosen & Katz as its legal counsel.