Level 3 to Buy Broadwing for $1.4 Billion

Level 3 Communications Inc. said today that it agreed to buy Broadwing Corp. for $1.4 billion in cash and stock, nearly doubling its enterprise telecom business and deepening its wholesale position.

“This provides significant value for investors beyond the obvious benefit of industry consolidation,” said Level 3 CFO Sunit Patel said during a conference call. “It provides sizable synergies that take advantage of our metro-access networks.”

The purchase will diversify Level 3’s base, of which only 10 percent of existing revenue comes from the enterprise segment. Broadwing, which has a 19,000-mile fiber network, brings about $900 million in revenue to the table, which is about evenly split between enterprise and wholesale revenues, Level 3 said.

“Broadwing has an enterprise sales force that is a key component of its success, and we will use that to accelerate the growth of our business markets,” said Kevin O’Hara, COO at Level 3.

The company cited the enterprise sales group as part of a strategic focus for Level 3 on the enterprise market going forward. “[Tapping the] enterprise is a core matter, an important matter,” said James Crowe, CEO at Level 3, which recently consolidated its customer-facing business markets group operations under one umbrella.

“The business markets group is major effort and focus in management, attention and capital,” said Crowe. “The key to success is to have facilities in the metro that allows a cost structure that’s better than the competition, and that means facilities to the premise.”

Broadwing has been growing at a 4 percent rate, compared to Level 3’s 20 percent. But Crowe said he expects to improve the profitability of the Broadwing business by leveraging the combined companies’ assets, thus reducing churn, improving margins and kick starting more sales. The efforts, executives said, will bring growth within the Broadwing base up to the 20 percent mark over time.

Level 3 will consolidate the combined companies’ traffic onto a single network to achieve opex and G&A reduction, bringing Broadwing’s off-net traffic onto its own network to achieve better margins. O’Hara said Level 3 will eliminate a “good portion” of Broadwing’s 19,000 route miles in aggregate because the two companies have duplicative city pairs.

This is the latest and perhaps last stop in a buying spree that has included Genuity Inc., WilTel Communications Group, Looking Glass Networks Inc., TelCove Inc. and ICG Communications. Executives said the company’s appetite for more M&A may for now be satiated, paving the way for the “hard work” of creating a common set of services and products, processes and network inventory across the company that everyone in the organization understands.

Level 3 will pay $744 million in cash plus 1.3411 shares of Level 3 common stock for each share of Broadwing common stock outstanding at closing, totaling 122 million shares. The deal values Broadwing at $15.31 per share. Level 3 said it expects the deal to contribute positive adjusted operating income before depreciation and amortization in 2007, and to generate $200 million to $250 million in 2008. Further, it expects the deal to contribute $200 million in free cash flow in 2009, taking into account the projected integration costs of $110 million to $130 million.

The deal will provide “liquidity until break-even,” Patel added.

Level 3 Communications Inc.

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