Analysis: Level 3 plans to acquire Global Crossing
Level 3 has announced its plans to acquire Global Crossing, a move which it refers to as a “transformational combination” taking it further into the multinational enterprise space.
Level 3 Communications has entered an agreement to acquire Global Crossing for approximately $3 billion, including the assumption of the company’s $1.1 billion of net debt.
The combined company will run a global services platform anchored by fibre-optic networks across three continents, with a customer base covering more than 50 countries and with connections to more than 70 countries. “The combined company’s network essentially gives us a facilities-based infrastructure across the US, Europe and Latin America,” said Sunit Patel, CFO of Level 3.
Patel also speaks with enthusiasm about the combined businesses’ extensive subsea cable system, which includes Global Crossing’s transatlantic AC1 cable, which provides the lowest latency link from New York to London. Now, 90% of Level 3’s revenues are from the US; after the acquisition, 12% will be from Latin America and 18% from Europe.
The new company aims to build on the strengths of both businesses, offering a comprehensive portfolio of end-to-end data, video and voice solutions to customers from enterprise, government, wholesale, content and online. Level 3 has been gradually diversifying into the enterprise space, building on a number of acquisitions to expand upon its wholesale origins. Patel commented that before the acquisition of Global Crossing, enterprise revenues made up about 40% of the company’s core network services (CNS) revenues. “The merger and acquisition with Global Crossing pushes up our enterprise mix of revenues to 56%,” he said, “which we think is a big positive.”
Aaron Blazar, a senior analyst at Atlantic-ACM, is supportive: “Global Crossing’s business product portfolio of IP, Ethernet, cloud and VoIP services will give a strong boost to Level 3’s business product set, as the combined company will have the capability to more effectively serve multinational large enterprise customers and US businesses that require high bandwidth services.”
Jim Crowe, CEO of Level 3, referred to the acquisition as a transformational combination for the business, saying: “The complementary fit between the two companies’ networks, service portfolios and customers is compelling. By leveraging the respective strengths and extensive reach of both companies, we are creating a highly efficient and more extensive global platform that is well-positioned to meet the local and international needs of our customers.”
Level 3’s acquisition will create a company with combined 2010 revenues of $6.26 billion, and 2010 adjusted EBITDA of $1.27 billion before synergies. The integration of the businesses is expected to create adjusted EBITDA synergies of approximately $300 million, with reduced capital expenditure of approximately $40 million a year. Of these savings, around 39% are from network expense savings, around 49% are from operating expense savings, and around 12% are from reductions in capital expenditures.
The acquisition will take the form of a tax-free, stock for stock transaction. Singapore Technologies Telemedia, Global Crossing’s largest shareholder, has welcomed the move, believing it will place the business in “a very favourable, competitive position to expand in the US and compete globally.”
The transaction is subject to regulatory approvals and requires the approval of the US Department of Justice and other regulatory agencies in the US, as well as the approval of the stockholders of each company. Nevertheless, the transaction is expected to close before the end of the year.
“We are committed to created a high-performing combined business through a carefully managed integration plan,” said Jeff Storey, president and COO of Level 3, explaining that the businesses will begin integration planning immediately.
Patel commented that Global Crossing will be “completely merged into Level 3,” operating under the Level 3 brand, but that the company will probably demonstrate a degree of caution in its new Latin American territories: “We’ll think some more about how long we take to transition in Latin America. We don’t have much of a presence and Global Crossing has been operating there.” There is likely to be a transitional period to draw on Global Crossing’s recognisable branding, but Patel did go on to comment that running two brands for a long period of time can be expensive.
Global Crossing is Level 3’s fourth major acquisition in recent years, following Genuity, WilTel Communcations and Broadwing Corporation. When asked whether Level 3 had plans for further acquisitions, Patel commented: “I think we’ll be consolidating for a little while.” Blazar suggested that Level 3’s previous intergrations had proven challenging. “However, if Level 3 has learned to navigate the tricky business of integration, look for rapid assimilation followed by a strong push to drive new business through these unified assets.”