Level 3 Communications, Inc. (NYSE: LVLT) and tw telecom (NASDAQ: TWTC) today announced that they have entered into a definitive agreement, intended to qualify as a tax-free reorganization, whereby Level 3 will acquire tw telecom in a stock-and-cash transaction valued at $40.86 per share based on market close as of June 13, 2014.
Under the terms and subject to the conditions of the agreement, tw telecom stockholders will receive $10 cash and 0.7 shares of Level 3 common stock for each share of tw telecom common stock that is owned at closing.
The combination leverages the highly complementary strengths of the two companies to create a stronger, more nimble, customer service-oriented competitor to meet customers' increasingly complex local, national and global communications needs.
"We believe this is a financially compelling and very strategic acquisition for Level 3 that will enhance our ability to continue to gain market share," said Jeff Storey, president and CEO of Level 3. "The transaction further solidifies Level 3's position as a premier global communications provider to the enterprise, government and carrier market, combining tw telecom's extensive local operations and assets in North America with Level 3's global assets and capabilities.
"tw telecom's business model is directly aligned with Level 3's initiatives for growth, which include building managed solutions to meet customer needs through an advanced IP/optical network. The benefits created by this transaction deliver substantial value to both companies' stockholders, as it accelerates our objective of driving profitable growth and strengthening Free Cash Flow per share growth over the long term."
"The transaction with Level 3 provides the combined company with an enhanced competitive position, our customers with a broader product offering, and better opportunities for our employees as part of a larger company in an industry where scale is important to compete effectively against larger competitors," said Larissa Herda, chairman and CEO of tw telecom. "The transaction provides our stockholders with meaningful immediate cash value for their investment in tw telecom, while enabling them to participate in the substantial upside potential of the combined company. We look forward to working together with Level 3 to ensure a smooth transition."
To ensure a successful integration, the companies will begin the planning process immediately that will be executed by a select team from both companies. The companies expect to benefit from their close geographic proximity, previous integration experience of both companies and tw telecom's fully integrated operating platform.
"The transaction is attractive from a financial perspective, as it is deleveraging and is accretive to Free Cash Flow per share after the first year," said Sunit Patel, executive vice president and chief financial officer of Level 3. "In addition, the combination is expected to provide $240 million of annualized synergies, with $200 million from Adjusted EBITDA savings and $40 million from capital expense savings."
Benefits of the Transaction
Combination Delivers Significant Benefits to Customers
- Level 3's global customers will benefit from tw telecom's deep metropolitan footprint and buildings connected to the network, enabling a higher quality and more reliable on-net experience for customers doing business in North America.
- tw telecom's customers will benefit from Level 3's extensive local-to-global footprint, with owned network and data centers in more than 60 countries and significant global subsea networks.
- Existing and prospective customers of both companies will benefit from the combined product portfolio, targeted at helping enterprises and carriers manage their growth in an efficient and secure manner.
- Both companies have developed a strategy and commitment to delivering an excellent customer experience, which will be a key pillar of the combined company.
- The combination of the two companies creates a stronger, more nimble competitor to the incumbents.
Transaction Creates Stockholder Value
- For the twelve months ending March 31, 2014, the combined company had pro forma revenue of $7.9 billion and Adjusted EBITDA of $2.2 billion before synergies and $2.4 billion including expected run-rate expense synergies.
- The transaction is expected to create substantial total annualized synergies of approximately $240 million, with $40 million from annualized capital expenditure savings and approximately $200 million of annualized Adjusted EBITDA savings. Of the total expected annualized Adjusted EBITDA savings, approximately 55 percent are from network expense savings and approximately 45 percent are from operating expense savings.
- The company estimates that the net present value of the potential synergies will be approximately $2 billion. The company expects to realize approximately 70 percent of expected Adjusted EBITDA savings within 18 months after closing the transaction.
- The company expects to incur approximately $170 million of integration costs associated with this transaction, with approximately 60 percent of those costs from operating expenses, and 40 percent from capital expenditures to support integration activities.
- The transaction is expected to be accretive to Free Cash Flow per share after the first year following transaction close.
tw telecom shareholders will receive $10 cash and 0.7 shares of Level 3 common stock for each share of tw telecom common stock that is owned at closing. The transaction is valued at $40.86 per share of tw telecom common stock based on market close as of June 13, 2014, or approximately $7.3 billion, including the assumption of approximately $1.6 billion of net debt as of March 31, 2014. tw telecom has approximately 138 million basic shares outstanding and approximately 139 million shares outstanding on a fully diluted basis, giving effect to outstanding stock awards. tw telecom stockholders will own approximately 29 percent of the combined company's outstanding shares, or 27 percent on a fully diluted basis, including the shares associated with Level 3's 7% Convertible Senior Notes due 2015.
As part of the transaction, Level 3 has received committed financing of $3 billion. Additionally, Level 3 and tw telecom have entered into a voting agreement with STT Crossing Ltd (a wholly owned subsidiary of Singapore Technologies Telemedia Pte Ltd), which owns approximately 23 percent of Level 3's outstanding stock.
Approvals and Timing of Transaction
In addition to customary closing conditions, the transaction is subject to regulatory approvals relating to competition law and licensing, including approvals by the U.S. Federal Communications Commission and other U.S. state regulatory agencies. The transaction is also subject to a vote of the stockholders of each company. The transaction is expected to close in the fourth quarter 2014.
Citi and BofA Merrill Lynch acted as financial advisors to Level 3. Rothschild provided a fairness opinion. Willkie Farr & Gallagher LLP acted as legal counsel to Level 3. Evercore acted as financial advisor to tw telecom and provided an opinion with respect to the fairness of the transaction. Wachtell, Lipton, Rosen & Katz acted as legal counsel to tw telecom. Credit Suisse Securities (USA) LLC acted as financial advisor to ST Telemedia.