Internet Service Provider Level 3 Communications Eyes Market Boost
Posted on: Thursday, 4 May 2006, 12:03 CDT
By Virgil Larson, Omaha World-Herald, Neb.
May 2--Level 3 Communications' planned acquisition of another fiber-optic network company -- its fourth either completed or announced in six months -- will triple the number of major urban markets in which it sells its services.
Buying TelCove Inc. would add 70 eastern U.S. markets to the Level 3 lineup.
Before the latest round of acquisitions began, Level 3, based in Broomfield, Colo., had local connections in 36 U.S. markets. With the addition of TelCove, Level 3 will be in 110 markets. Instead of connections to 900 buildings in urban markets, it will be tied into 5,200.
Buildings mean enterprise customers -- big businesses that buy services -- and such other end points as data centers, local telephone company central offices, wireless phone switch centers and cable company heads. Level 3 carries voice, data and other traffic and services between such points.
Kevin O'Hara, Level 3's president and chief operating officer, said TelCove's markets are what Level 3 wanted. "They tend to have a very good network in the markets," O'Hara said in an interview Monday. "That is what we found most attractive... not the fiber that connected the markets necessarily as much as the fiber in the markets."
So unlike some acquisitions Level 3 has made, there won't be great savings in consolidating overlapping long-distance networks, he said. "The bigger value driver is going to be selling more long-haul services to TelCove's customer base."
TelCove does not sell many services outside its region to its customers, O'Hara said. But Level 3, with its nationwide and European networks, can do that for what are now TelCove's customers, "which we think would have a positive effect on the (Level 3) backbone system."
On top of that, he said, "I think we can sell more of the traditional Level 3 services deeper into the footprint TelCove has constructed over the years."
The acquisition, which was announced Monday, will cost Level 3 $1.24 billion: $637 million in Level 3 stock, $445 million in cash and $155.5 million in TelCove debt that Level 3 will assume. Chief Financial Officer Sunit Patel said on an analysts' conference call that $140 million of the debt would be paid off when the deal closes, which is expected in the July-September quarter,
TelCove is the most expensive of the four acquisitions, with Wiltel Communications LLC, a deal that closed in December, also costing more than $1 billion in cash and stock. Progress Telecommunications LLC cost $163 million and ICG Communications Inc., $137 million.
TelCove, based in Pennsylvania, has 22,000 network miles and sells transport, Internet access and voice services. It has 4,000 buildings on its metropolitan and regional network that Level 3 will add to its network.
TelCove has annual revenue of $390 million, Level 3 said. Level 3 had revenue of $3.61 billion last year and last month forecast $5 billion in 2006, with part of the increase coming from the three other acquisitions the company has completed or announced in less than six months.
The company did not give new figures on expected revenue Monday. Patel said the company would update guidance when it reports earnings for the April-June quarter.
Acquiring TelCove will reduce Level 3's buying of services from third parties, O'Hara said on the conference call.
Level 3 also announced Monday that it will set up a new division, Metro Services, that will pick up parts of the acquisitions as well as the urban network services that Level 3 already had. That unit should account for about $700 million of Level 3's 2006 revenue, Patel said.
Level 3 is banking heavily on carrying larger amounts of voice and video traffic on its intercity and metropolitan-area networks to soak up excess capacity and raise operating margins.
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LVLT,
Source: Omaha World-Herald
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