The Deal

On June 16^th, long-haul Internet giant Level 3 Communications Inc. announced its acquisition of leading business Ethernet provider TW Telecom for approximately $7.6 billion.  Under terms of the deal, tw telecom stockholders will receive $10 cash and 0.7 shares of Level 3 common stock for each tw telecom share owned at the deal’s close; a value of approximately $40.86 per share based on the market close as of June 13, 2014.  Level 3 will also assume tw telecom’s outstanding debt which was approximately $1.9b as of March 31, 2014.

Strategic Considerations

The tw telecom acquisition nearly doubles Level 3’s metro fiber footprint in the U.S., adding a fiber network with 23,000 metropolitan route miles and 20,255 POPs across 75 U.S. metropolitan markets.  The combined network will span 50,000 metropolitan route miles in North America and 213,000 total fiber route miles globally. 

The metro focus of tw telecom’s network and its connections to thousands of businesses will enable Level 3 to keep more of its enterprise metro traffic on-network, leading to significant network cost savings.  Management anticipates $200m in annualized cost synergies, 55 percent of which is related to network expense savings.  Level 3 also anticipates approximately $40m in annualized capital expenditure savings generated from the deal.

Financial Highlights

Level 3 paid approximately 4.8x trailing revenue and 13.8x trailing OIBDA for tw telecom—a premium of 12 percent to where the public market was trading shares of TWTC.  Considering the anticipated $200m in annualized synergies, the deal’s pro forma OIBDA multiple to 10.1x.  Management expects that it will begin to realize $140m in annual cost savings within 18 months of the transactions close, with the balance of the synergies to come in subsequent years.  Level 3 expects to incur roughly $170m in integration costs associated with the transaction.