Level 3 to acquire TW Telecom

August 2014 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Internet provider Level 3 Communications Ltd has agreed to acquire rival firm TW Telecom in a deal worth around $5.7bn in cash and stock.

Under the terms of the deal announced in June, TW Telecom’s shareholders will receive $10 cash and 0.7 shares of Level 3 common stock for each TW Telecom common stock they own at the time the deal closes. Accordingly, the transaction is valued at $40.86 per share of TW Telecom common stock – a 12 percent premium on the company’s closing price on 13 June, the last business day before the deal was announced. Including the assumption of around $1.6bn of net debt, the total value of the transaction will be approximately $7.3bn. The two companies intend the deal to qualify as a tax-free reorganisation.

Both firms expect the deal to complete in the fourth quarter of 2014 subject to the approval of the shareholders of both companies, as well as the customary closing conditions. In a joint statement announcing the deal, Level 3 confirmed that its largest shareholder would be voting in favour of the merger. STT Crossing Ltd is a wholly owned subsidiary of Singapore Technologies Telemedia Pte Ltd and owns a 23 percent stake in the company. “We believe this is a financially compelling and very strategic acquisition for Level 3 that will enhance our ability to continue to gain market share,” Jeff Storey, president and chief executive of Level 3, said in the statement. “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.”

Level 3 expects the integration costs of the merger to be around $170m, though the deal will bring potential savings of approximately $240m annually, including $40m from capital expenses. As a result of the merger, the combined company would have net income of around $114m and $7.9bn in revenue for the 12 months ended 31 March 2014. The newly merged firm will have debts of around $11.5bn and $431m in cash. Level 3 has noted that the synergies associated with the deal will help reduce its ratio of net debt to adjusted EBITDA to 4.5 from 4.6.

TW Telecom, founded in 1993 as a joint venture between US West and Time Warner, is one of the largest business ethernet providers in the US. The firm has more than 20,000 commercial buildings across the country connected to its fibre network. TW Telecom also has more than 30,000 miles of fibre-optic lines across its network. “The transaction with Level 3 provides the combined company with an enhanced competitive position, our customers with a broader product offering, and better opportunities for our employees as part of a larger company in an industry where scale is important to compete effectively against larger competitors,” said Larissa Herda, chairman and chief executive of TW Telecom. “The transaction provides our stockholders with meaningful immediate cash value for their investment in TW Telecom, while enabling them to participate in the substantial upside potential of the combined company. We look forward to working together with Level 3 to ensure a smooth transition.”

The merged company will have a major impact on the US telecom industry, and rival firms such as AT&T Inc, Verizon Communications and Centurylink Inc will all be adversely affected. The deal for Littleton, Colorado based TW Telecom is the latest in a series of high profile, high cost mergers in the US telecommunications market this year. Indeed, AT&T and Comcast Corporation have both pursued multibillion dollar takeovers in the past six months.

Richard Summerfield