Level 3 to Acquire Global Crossing in $3 Billion Deal
Level 3 agreed to buy Global Crossing in an all-stock transaction worth $3 billion, including a $1.1 billion Global Crossing debt, the companies said Monday. The combined network will serve a customer set with owned network in more than 50 countries and connections to more than 70, executives said during a conference call. Industry analysts said they expected the deal to be approved with few or no regulatory obstacles. The deal will have to be approved by the FCC, the Department of Justice, likely with input from the government’s “team telecom” -- staff from the Departments of State, Homeland Security and the Pentagon, one telco lawyer told us.
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Level 3 is a hybrid company with a longish legacy in Internet backbone, but it also has CLEC functions and some undersea cable. Global Crossing is almost exclusively an undersea cable provider. The FCC review will likely be handled by staff from the Wireline and International Bureaus, commission officials and a telco attorney told us. It’s not clear how long the regulatory review will take. An FCC spokesman declined comment for this story.
The transaction needs regulatory approvals relating to competition law, licensing, financing and foreign ownership, including approvals by the U.S. Department of Justice, the FCC and other regulatory agencies in the U.S. and in countries where the companies do business. Both companies are small players so the deal isn’t expected to increase market concentration, an industry analyst said. He expects no or limited regulatory obstacles. The long haul market is still fragmented so there shouldn’t be regulatory hurdles, agreed Donna Jaegers with D.A. Davidson. Regulatory agencies in other countries, such as EU, are likely to follow the U.S. lead, she said.
"Anyone building a network with the kind of capital intensity that goes into metro and global network assets would want to get as large a return from as many diverse sources of customers and services as they possibly can,” Level 3 CEO Jim Crowe said. Crowe will lead the combined entity. “You don’t build metro networks just to serve medium and small enterprises; you want to serve wholesale, content, large enterprise, government, wireless and wired broadband,” he said. A major strength of the deal is the ability to have substantial access to “literally all customer segments,” he said, noting Global Crossing’s large enterprise and government customer base. The deal is expected to close by the end of the year.
"When this is done, we don’t take all the Global Crossing traffic and put it on Level 3,” Crowe said. The engineers will deploy the best combination of assets to have the lowest possible cost and highest level of customer service, he said. Subsea networks will be one area for increased operational synergy: “Global Crossing has an enormous subsea footprint with a large organization and we're looking forward to getting a lot more efficiency under the sea,” Crowe said. Although job cuts are possible, Crowe said he plans to retain and expand the combined sales force. When asked if the company sees potential for more acquisitions, he said the focus will be on closing the Global Crossing deal for now.
The deal has been discussed multiple times in the last few years, Global Crossing CEO John Legere said. There’s an increasing need for scale among the global telecom players, he said, also noting the rise in video and cloud computing traffic expected in the coming years around the world. The executives stressed growth opportunities in Latin America and Asia in particular. The combined company is expected to have extensive submarine fiber networks, metro networks with dense fiber connectivity, data centers and collocation facilities on three continents, Legere said. Global Crossing’s majority shareholder Singapore Technologies Telemedia has agreed to vote its shares in favor of the transaction. ST Telemedia will also designate members to Level 3’s board.
"The two most competitive segments within telecom have been wireless and long haul, said Jonathan Chaplin of Credit Suisse. “With this deal we are now seeing the benefits of consolidation in long haul,” he said. The long-haul market should see more stable pricing as a consequence of this deal, which should lead to higher revenue growth, higher margins and improved returns for the industry, he said. The deal is a start of a more rational pricing, said Jaegers. Additional consolidations in the long-haul business is likely, some analysts said, citing XO Holdings and Cogent as potential targets.
Moody’s Investment Service said it’s reviewing the proposed deal and might upgrade Level 3’s stock rating. “Since we expect the transaction to result in reduced leverage and improved free cash generation, Level 3’s ratings have been placed on review for possible upgrade.” It warned, however, that overall may remain unchanged. Global Crossing’s rating remained “uncertain,” however, Moody’s said in a separate email.