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WilTel, Level 3 Agree to Deal

Posted on: Tuesday, 1 November 2005, 21:00 CST

By Don Mecoy, The Daily Oklahoman

Nov. 1--TULSA -- Level 3 Communications has agreed to buy Tulsa's WilTel Communications Group from Leucadia National Corp. for about $680 million in cash and stock, the companies announced Monday.

WilTel's acquisition by a fellow broadband wholesaler will prompt layoffs as Level 3 consolidates the Tulsa company, said Josh Howell, group vice president for Level 3. WilTel has 1,800 employees, including 1,200 in Tulsa.

"As you would expect in a merger of this nature, there are going to be cost savings, and that will involve reductions in work force," Howell said. "However, we're going to look across both companies and select and retain the best people from both organizations, or in effect, from the combined organization."

WilTel Chief Executive Officer Jeff Storey said the consolidation will create a company stronger than either of the separate entities involved in the deal.

"A primary benefit in combining these businesses will be the efficiencies gained from eliminating duplicate functions, operations and services," Storey said in a statement.

Broomfield, Colo.-based Level 3 would pay 115 million shares of its stock, valued at $310.5 million based on Friday's closing price of $2.70, plus $370 million in cash. Level 3 has the right to substitute cash in lieu of stock. The deal, pending regulatory approval, is expected to close early next year.

When the deal closes, Level 3 will enter into a two-year lease agreement with Leucadia for a portion of WilTel's Technology Center in Tulsa.

Leucadia will retain WilTel's existing $358 million credit facility, the Tulsa headquarters, and the $60 million mortgage on the building.

Leucadia will also retain WilTel's obligations under its defined benefit pension plan.

WilTel, formerly known as Williams Communications Group before seeking bankruptcy protection in 2002, delivers voice, data, video and IP services over a fiber optic network that covers nearly 30,000 miles and includes about 40 large U.S. cities.

SBC is WilTel's largest customer, accounting for 70 percent of the network segment's 2005 telecommunications revenues.

But SBC will migrate its service to the AT&T Corp. network over the next couple of years.

The agreement allows Leucadia to retain the right to receive a $236 million termination payment from SBC.

Level 3 expects WilTel to contribute $1.5 billion to $1.6 billion of revenue in 2006. Based on the expected migration of SBC traffic to merged SBC and AT&T facilities, that is expected to decline to about $600 million in 2008.

Leucadia, which bought nearly half of WilTel upon its emergence from bankruptcy, later acquired the remainder of the company in a stock swap. Leucadia, a New York-based holding company with widespread interests, paid about $780 million in cash and stock for WilTel.

Williams Communications Group Inc. sought bankruptcy protection in April 2002 and emerged six months later having shed billions of dollars of debt, but with a new name and new ownership. But the telecommunications industry still had far more capacity than demand for WilTel's fiber-optic network.

WilTel's network unit owns or leases and operates a nationwide fiber optic network over which it provides a variety of telecommunications services. WilTel's Vyvx segment transmits programming over the network and distributes advertising media.

The merged network will add 50 markets and 3,000 route miles to Level 3's facilities, said Kevin O'Hara, Level 3 president and chief operating officer.

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LVLT, LUK, SBC, T,

Source: The Daily Oklahoman

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