Level 3 to acquire Global Crossing

Level 3 Communications Inc. and Global Crossing Limited have entered into a definitive agreement under which Level 3 will acquire Global Crossing in a tax-free, stock-for-stock transaction.

Level 3 Communications Inc. and Global Crossing Limited have entered into a definitive agreement under which Level 3 will acquire Global Crossing in a tax-free, stock-for-stock transaction.

The combined company will operate a global services platform anchored by fiber-optic networks on three continents, connected by extensive undersea facilities. The combined network will serve a worldwide customer set with owned network in more than 50 countries and connections to more than 70 countries.

This transaction will create a company with pro forma combined 2010 revenues of $6.26 billion and pro forma combined 2010 Adjusted EBITDA of $1.27 billion before synergies and $1.57 billion after expected synergies.

Global Crossing shareholders will receive 16 shares of Level 3 common stock for each share of Global Crossing common stock or preferred stock that is owned at closing. Based on Level 3’s closing stock price on April 8, 2011, the transaction is valued at $23.04 per Global Crossing common or preferred share, or approximately $3.0 billion, including the assumption of approximately $1.1 billion of net debt as of Dec. 31, 2010. Global Crossing has approximately 79 million basic and preferred shares outstanding and approximately 83 million shares outstanding on a fully diluted basis, giving effect to outstanding stock awards, but excluding performance-based stock grants.

The transaction will create a company with the capability to meet local, national, and global customer requirements in a wide range of markets. By combining the strengths of each company, the new entity will offer enterprise, government, wholesale, content, and Web-based customers a comprehensive portfolio of end-to-end data, video, and voice systems.

“This is a transformational combination that we believe will deliver significant value to the investors, customers, and employees of both Level 3 and Global Crossing,” says Jim Crowe, chief executive officer of Level 3. “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.”

“We are committed to creating a high-performing combined business through a carefully managed integration plan executed by a select team from both companies,” says Jeff Storey, president and chief operating officer of Level 3. “We will begin integration planning immediately and bring an aggressive, disciplined approach to the process. After the closing, as we integrate the two operations and work to achieve our expected synergies, we will be dedicated to maintaining our focus on providing excellent customer service and growing our combined revenues.”

Through integration of the combined businesses, the transaction is expected to create substantial annualized Adjusted EBITDA synergies of approximately $300 million and annualized capital expenditure reduction of approximately $40 million. Level 3 expects to realize approximately two-thirds of the run rate Adjusted EBITDA synergies within 18 months of closing. The company estimates that the net present value of the potential synergies will be approximately $2.5 billion. Of the total expected synergies, approximately 39 percent are from network expense savings, approximately 49 percent from operating expense savings, and approximately 12 percent are from reductions in capital expenditures. The company expects to incur approximately $200 to $225 million of integration costs associated with this transaction. Approximately 55 percent of those costs are expected to be from operating expenses, and 45 percent are expected to be from capital expenditures to support integration activities.

Including the benefit of synergies and the cost of integration, the transaction is expected to be accretive to Level 3’s Free Cash Flow per share in 2013. As a result of potential revenue growth and synergies, over the longer term, Level 3 expects to have significant Free Cash Flow available for investment in high-return opportunities, including U.S. and international network expansions, and potential repurchase of the company’s securities.

The transaction is expected to improve Level 3’s credit profile as well as significantly strengthen the company’s balance sheet. On a pro forma basis and including the benefit of expected synergies, the ratio of net debt (including capital leases) to Adjusted EBITDA is expected to improve from 6.8x to 4.4x as of Dec. 31, 2010.

Existing customers will benefit from expanded geographic reach and a combination of intercity networks and metro networks throughout North America, Latin America and Europe connected by extensive global subsea networks. The combined business will leverage Global Crossing’s long-term IRU's on the PC1 and EAC cable systems, focusing on telecom operators based in Asia. The combined network will serve a worldwide customer set with owned network in more than 50 countries and reach to more than 70 countries.

The combined business will offer an extensive portfolio of transport, IP and data systems, content delivery, data center, colocation and voice services, delivered globally. Global Crossing will bring important additions to Level 3’s service portfolio, including managed services, collaboration services and inter-continental virtual private networking capability. The combined service portfolio and distribution channels will allow Level 3 to better address the needs of enterprises, content providers, carriers and governments throughout North America, Latin America and Europe.

Global Crossing’s enterprise service portfolio and proven sales expertise together with the improved cost structure and performance achievable by combining the extensive international, intercity and metro networks will enable opportunities for improved growth by giving enterprises better options to meet their local, national and international communications needs.

Level 3 Financing, Inc., a wholly owned subsidiary of Level 3, has received committed financing for $1.75 billion in connection with this acquisition.

In conjunction with this transaction, Level 3 has signed a Voting Agreement with ST Telemedia, the company which owns approximately 60 percent of Global Crossing’s stock, whereby ST Telemedia has agreed to vote its shares in favor of the transaction, subject to certain terms and conditions. Level 3 and ST Telemedia have also signed a Stockholder Rights Agreement, which becomes effective upon closing and which allows ST Telemedia to designate members to the Level 3 board of directors, proportionate to their stock ownership. In addition, the Stockholder Rights Agreement contains a standstill provision which imposes limitations on ST Telemedia’s ability to purchase or sell Level 3 common stock.

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