May 1, 2006 Broomfield, CO -- Level 3 Communications announced that it has signed a definitive agreement to acquire TelCove, a privately held telecom company based in Pennsylvania. Under terms of the agreement, Level 3 will pay total consideration of $1.2375 billion, consisting of $637 million in shares of Level 3 common stock, $445 million in cash, and $155.5 million in the assumption of debt.
TelCove is a facilities-based provider of metropolitan and regional communications services including transport, Internet access, and voice services. The provider's network has over 22,000 local and long haul route miles serving 70 markets across the eastern United States, with approximately 4,000 buildings "on net."
"The acquisition of TelCove increases our ability to provide end-to-end bandwidth services to our customers," comments James Q. Crowe, CEO of Level 3 Communications. "In addition to the contribution to operating margins, this additional metropolitan and regional capability will enable us to extend the network reach we offer to our customers, and enable TelCove's customers to benefit from our national network and broad suite of IP-based services."
TelCove has annual revenues of about $390 million and Adjusted OIBDA of about $130 million. According to a press release, as part of the transaction, Level 3 will be acquiring over 300 LMDS and 39 GHz licenses covering 90% of the population of the United States.
"Bay Harbour Management has been the controlling shareholder of TelCove for two years. Our team, headed by Kurt Cellar, has worked closely with TelCove to nurture growth through significant capital investment and acquisitions," comments Doug P. Teitelbaum, managing partner of Bay Harbour Management, LC. "This merger with Level 3 accomplishes our goals by positioning us to be investors in a leading nationwide communications carrier."
According to the release, after integration, TelCove's metropolitan and regional networks will connect Level 3's national backbone network directly to traffic aggregation points. These aggregation points include other carriers' points of presence, local telecommunications companies' central offices, wireless providers' switch centers, co-location and data centers, cable company head ends, and high-bandwidth enterprise locations.
Before the pending acquisitions of TelCove and ICG Communications and the completed acquisition of Progress Telecom, Level 3 already had metro infrastructure in 36 markets, connecting to approximately 900 traffic aggregation points. Level 3 says the acquisition of Progress and, after close, of TelCove and ICG Communications will increase the number of traffic aggregation points to approximately 5,000 in the U.S. and approximately 5,200 globally.
"In order to assure the attention that is necessary to fully leverage Level 3's metro assets, we have formed Level 3 Metro Services, a separate business unit with the appropriate management, sales, and technical resources at the local level to ensure a clear focus on those markets," comments Kevin O'Hara, president and COO of Level 3.
"For the full year 2006, TelCove standalone is expected to generate approximately $380 million to $400 million of annualized revenue and approximately $125 million to $135 million of annualized Adjusted OIBDA," reports Sunit S. Patel, chief financial officer of Level 3 Communications. "TelCove's annual revenue growth rate is expected to average approximately 10 to 12 percent and with gross margins over 80 percent. We expect integration costs of approximately $75 million which comprises about $25 million in operating expenses and $50 million in capital expenditures. Most of the integration expenses will be incurred in 2007. We expect TelCove's 2007 Adjusted OIBDA to be approximately $150 million, improving to approximately $220 million in 2008 upon completion of integration. Capital expenditures, before integration, are expected to range between 20 percent and 25 percent of annualized revenue after 2006. The addition of TelCove's high-margin revenues enhance our margin profile and improve our financial leverage."
"The integration model for TelCove is different than a number of other acquisitions Level 3 has completed, where synergies were driven through the elimination of overlapping facilities and duplicative costs," adds O'Hara. "While certain functions will be integrated and some positions eliminated, the primary drivers of value are opportunities to reduce Level 3's network related expenses and to increase sales to existing and new customers.
We will immediately begin integration planning to the extent permitted by applicable law. With our experience and expertise in integration activities, we believe that we are well positioned for a smooth integration process."
According to the release, the number of shares of Level 3's common stock to be delivered at closing will determined by dividing $637 million by Level 3's volume-weighted average share price for the ten trading days ending on the trading day immediately preceding the fourth trading day prior to closing, but in no case will the number of shares that Level 3 is required to deliver at closing be greater than approximately 166 million shares or less than approximately 111 million shares.
Closing is subject to customary conditions, including receipt of applicable state and federal regulatory approvals, and is also subject to a vote to approve an increase in the number of authorized shares of Level 3's common stock, which is scheduled to occur at Level 3's annual stockholder meeting on May 15, 2006. The holders of more than a majority of TelCove's stock have irrevocably approved the transaction and therefore the transaction is not subject to any additional approvals by TelCove's security holders. Closing is expected to occur in the third quarter of 2006.