Level 3 to acquire Global Crossing to scale global reach, video service capabilities

Looking to gain greater network reach and IP and CDN capabilities, Level 3 Communications (Nasdaq: LVLT) has struck a deal to acquire Global Crossing (Nasdaq: GLBC).

When the deal is complete, the combined company will serve customers in over 50 countries and connections to over 70 countries.

When combined from a geographic and revenue perspective, the new company's revenue will be dominant in three regions: North America will make up 70 percent ($3.57 billion) of revenue; Europe will make up 18 percent ($939 million); and Latin America will make up 12 percent ($597 million).

Service revenue, meanwhile, will consist of 56 percent enterprise ($2.85 billion) and 44 percent wholesale ($2.25 billion).

From a revenue standpoint, the deal will create what Level 3 says is a company with pro forma 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.

Complementary assets
Level 3 believes the deal will enable it to simultaneously enhance its service portfolio in not only the U.S., but also in emerging service opportunities in both Asia Pacific and Latin America.

From a service perspective, Jeff Storey, COO of Level 3, said that the complementary nature of both companies increases its addressable markets.

"Between the two companies we will offer an extensive suite of services to meet customer's needs, including the complex requirements of integrated solutions across multiple geographies," he said, adding that Level 3 will be able to augment its transport, CDN platform and collocation services "with Global Crossing's collaboration services, VPN, cloud offerings and managed services."

Global Crossing, for one, will be able to leverage Level 3's metro fiber footprint to provide more of its enterprise services over its own network to more customers.

"Level 3's extensive metro presence in the U.S. will not only provide the opportunity to improve the financial profile of Global Crossing's revenue base, but will also make their enterprise offerings more competitive in the marketplace by leveraging a more extensive network footprint," Storey said.

One of the major growth drivers Level 3 will be around CDN services. While it has extensive CDN presence in the U.S., the Global Crossing acquisition will give it instant CDN access in Latin America, one that Global Crossing recently bolstered with its acquisition of Genesis Networks, in addition to mid-market and large enterprise services.

"With the acquisition, Level 3 will have access to Global Crossing's extensive footprint in Latin America, Storey said. "With the growing demand for content in Latin America, we can further further expand our CDN capabilities throughout the region."

Brian Washburn, Research Director for Business Network Services at Current Analysis, agreed that while "Global Crossing does give Level 3 solid on-the-ground operations in Latin America, and a nice footprint for the continent," adding that "Global Crossing has infrastructure connecting Asia, I don't see either company being particularly strong there because it's mainly about hop-on/hop-off points to submarine cables to connect to the rest of the world."

Level 3 Global Crossing network map

Avoiding integration problems
Level 3's acquisition of Global Crossing comes after a long period where the service provider took a break from raft of acquisitions that posed various integration challenges for the company in 2007.

While Jim Crowe, CEO of Level 3, admitted that Level 3 had some issues with the previous acquisitions, he said that much of those were at the metro level, a factor that he said is not an issue with the Global Crossing deal.

"When we acquired and merged with intercity networks (such as) WilTel, Genuity and the long-distance portion of Broadwing, they went very well," he said. "Where we ran into difficulty was with metro assets or local CLECs here in the U.S. We were able to meet our merger model cost targets, but the problems came on the revenue line."  

Washburn believes that Level 3 is being proactive about nipping potential integration problems before they begin. "Level 3 is trying to get out front with a strong signal that this will not be at all like its messy metro-centric acquisitions (TelCove, Progress Telecom etc.), he said.

Of course, the biggest challenge that Level 3 will face in purchasing Global Crossing is integrating the two companies and eliminating possible redundancies, which could mean possible company layoffs. However, Crowe said during the call that he plans to keep the sale organization's staff intact and grow it to pursue new opportunities.

"You have two companies, roughly the same size and employee base, [both of which have] worked through the tech bubble collapse, the financial services collapse and difficult times...with strengths and capabilities. Our over-riding goal, and we're serious about this, is to fill every position with the best possible [person]," he said.

For more:
- see the release
- Reuters has this article

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