I really don’t have any commentary on this deal yet except to say that Wiltel has been pretty quiet lately and Level 3 has been doing an admirable job promoting themselves. By combining networks, Level 3 gets access to more route miles and 50 new markets. This seems like a good move for Level 3 and Wiltel.
My only concern is that there are fewer and fewer companies who own the data pipes left. At the same time there is a proliferation of companies looking to distribute content on these pipes – whether they be voice or video. Take a look at my SBC Goes Trick-Or-Treating article to see why I am concerned.
Level 3 Acquires WilTel
Purchase Price Consists of 115 Million Shares Of Level 3 Common Stock And $370 Million in Cash
Transaction Includes Multi-Year SBC Contract
Company Will Acquire And Operate Vyvx Subsidiary
BROOMFIELD, Colo., October 31, 2005 – Level 3 Communications, Inc. (Nasdaq: LVLT) today announced that it has signed a definitive agreement with Leucadia National Corporation (NYSE: LUK) under which Level 3 will acquire WilTel Communications Group, LLC. Level 3 will pay 115 million shares of Level 3 common stock and $370 million cash. The agreement provides that Level 3 will not acquire certain assets and liabilities of WilTel. Closing is expected to occur in the first quarter of 2006, subject to customary closing conditions including receipt of state and federal regulatory approvals.
"There is a unique and compelling fit between WilTel and Level 3," said James Q. Crowe, chief executive officer of Level 3. "Both companies are experienced providers of optical and IP-based services, and both serve similar customer bases.
"We believe this transaction brings together the two premier providers of communications backbone services and that our customers will benefit significantly from that shared institutional excellence. We also believe the combined technical and service capabilities will help support and advance our customers’ transition to IP technology and Voice over IP," said Crowe.
"WilTel has a reputation based on consistent delivery, operational excellence and proven customer satisfaction, and we believe that Level 3 has a similar reputation and shares our vision of the future of IP communications and technology convergence," said Jeff K. Storey, president and chief executive officer of WilTel Communications.
"We expect to achieve substantial synergies through this transaction," said Kevin O’Hara, president and chief operating officer of Level 3. "We plan to combine and optimize the Level 3 and WilTel networks. The merged network will reach 50 new markets and include 3000 new route miles compared with Level 3’s pre-acquisition facilities. We expect to migrate substantially all of WilTel’s IP, optical and voice transport traffic to the combined network."
The transaction includes the contract between WilTel and its largest customer, SBC. In January 2005, SBC announced its pending merger with AT&T and its intention to migrate the services provided by WilTel to the merged SBC and AT&T network. In anticipation of the successful completion of the SBC and AT&T merger, the contract between WilTel and SBC was amended.
The amended SBC agreement runs through 2009 and provides for a purchase commitment of $600 million from January 2005 through the end of 2007, and $75 million from January 2008 through the end of 2009. Only purchases of on-net services count toward satisfaction of this purchase commitment. Originating and terminating access charges paid to local phone companies are passed through to SBC in accordance with a formula that approximates cost. Additionally, the SBC agreement provides for the payment of $50 million from SBC if certain performance criteria are met.
"SBC is an existing and important customer of Level 3, and we look forward to expanding our relationship with them," said Crowe. "We are committed to working hard to ensure a smoot
h transition for SBC throughout this process."
"We have had a long and mutually beneficial relationship with WilTel Communications and Leucadia National Corporation and their management teams," said James S. Kahan, senior executive vice president of corporate development for SBC. "We are supportive of the transaction with Level 3 and look forward to working with the Level 3 team as we have on numerous occasions in the past."
Vyvx video business
As a part of the transaction, Level 3 will acquire the WilTel subsidiary, Vyvx, LLC, the industry leader in gathering and distributing broadcast quality live and non-live video for the media and entertainment industry. The company delivers nearly 250,000 fiber and satellite video feeds, and more than 5 million ads and promotional media content around the world each year.
"We recognize the importance of Vyvx’s customers and are committed to ensuring they receive the highest quality service without disruption," said O’Hara.
"We believe that Vyvx’s expertise in transporting video combined with its strong brand and customer relationships may create some additional opportunities for Level 3 as the video transport market evolves."
Vyvx reported $120 million in revenue in 2004 and $59 million in revenue for the first six months of 2005.
Under the terms of the Level 3-Leucadia agreement:
Level 3 will pay 115 million shares of Level 3 common stock and $370 million in cash subject to certain adjustments as described below.
Level 3 has the right to substitute cash in lieu of delivering common stock.
Leucadia will retain WilTel’s existing $358 million credit facility, its
Level 3’s $370 million cash consideration at closing is subject to certain adjustments relating to working capital and time of closing. It is anticipated that Leucadia will retain any cash and marketable securities in excess of $100 million.
Closing is subject to customary conditions including receipt of Hart-Scott-Rodino approval, and federal and state regulatory approvals.
As part of the transaction, Leucadia will retain the right to receive a $236 million termination payment from SBC.
Including the SBC master agreement contract, Level 3 expects WilTel to contribute $1.5 to $1.6 billion of revenue in 2006. Based on the expected migration of SBC traffic to merged SBC and AT&T facilities, this amount is expected to decline to approximately $600 million in 2008. Level 3 expects WilTel to contribute approximately $50-90 million in cash flow in 2006, including integration costs, and approximately $125-150 million on an annual basis thereafter. Level 3 expects integration costs to be $100-150 million. Assuming the transaction closes in the first quarter of next year, the majority of integration costs are expected to be incurred in 2006
"These incremental cash flow projections are preliminary, and we expect to refine them and provide more detail as we proceed with the integration planning over the next few months," said Sunit Patel, chief financial officer of Level 3.
"We anticipate that integration of the network businesses will take approximately 15-18 months as we streamline processes and systems, and migrate IP, optical and voice transport traffic to an optimized Level 3 and WilTel network," said O’Hara. "During the integration process, we will work hard to identify and retain the best employees from both companies in order to create the strongest possible integrated organization."
"The transaction will increase the size and scale of Level 3’s transport, IP and voice businesses, and add a market leading video transport business," said Crowe. "It will add high credit quality customers and a group of high quality employees. The
transaction will broaden our network capabilities, enabling the company to access new markets and increase capacity on major traffic routes. It will allow the combined operations to benefit from significant synergies resulting from the elimination of duplicative network infrastructure and common resources. And we believe that the transaction will significantly strengthen our financial position."
JPMorgan and Evercore Partners acted as financial advisers to Level 3. Willkie Farr & Gallagher LLP acted as legal counsel to Level 3.