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Level 3 buying WilTel for $680M

Level 3 Communications Inc. agreed to buy WilTel Communications Group LLC for $680.5 million in cash and stock to expand its fiber-optic network and enable it to better compete with larger telephone carriers.

Leucadia National Corp., owner of WilTel, will receive 115 million shares of Level 3 and $370 million in cash, Level 3, based in Broomfield, Colo., said Monday in a statement. Level 3 won't take on WilTel's debt or its headquarters in Tulsa, Okla.

The purchase will allow Level 3 to expand into 50 new markets. Broadening its service may help Level 3 compete with SBC Communications Inc. and Verizon Communications Inc., both of which are expanding through the purchase of long-distance phone providers. The combination brings together two companies that have racked up more than $13 billion in losses since the pace of network expansion outstripped demand starting in the late 1990s.

"They are two of the larger players in the industry, and by partnering it could help alleviate some of the pricing pressure" caused by overcapacity, said Todd Rosenbluth, a New York-based Standard & Poor's analyst who rates the shares "hold" and doesn't own them. "That's their thesis, and we think it could do so."

Shares of New York-based Leucadia, which has operations in Utah, rose $1.37, or 3.3 percent, to close at $42.96 Monday on the New York Stock Exchange. Shares of Level 3 gained 18 cents, or 6.7 percent, to $2.88 in Nasdaq Stock Market composite trading.

"The baby bells are getting bigger and beginning to offer services nationwide," said Jeff Kagan, an independent telecommunication analyst in Atlanta. "It's important for companies like Level 3 and WilTel to bulk up."

Level 3 will also gain a contract with SBC, the second-largest U.S. local-telephone company behind Verizon, which is set to spend $600 million with WilTel by the end of 2007. Leucadia paid about $419 million in stock for the remaining 52.6 percent of WilTel it didn't already own in August 2003.

The contract with SBC will end in 2009, when the San Antonio-based phone company plans to switch its long-distance calls and other data traffic to the network of AT&T Corp., which it is acquiring. The U.S. Federal Communications Commission voted Monday to approve that $16 billion purchase and Verizon's $8.44 billion acquisition of MCI Corp.

WilTel will add sales of as much as $1.6 billion next year and cash flow of $50 million to $90 million, Level 3 said. The revenue will decline to about $600 million annually by 2008 with the ending of the SBC deal.

After next year, WilTel, the former Williams Communications Group that emerged from bankruptcy in 2002, will contribute up to $150 million a year in cash flow. Integration costs of $100 million to $150 million are expected.

The "vast majority" of those expenses will occur next year, Level 3 Chief Financial Officer Sunit Patel said on a conference call Monday with analysts. The combined company will pick the best employees, and no decision has been made on where it will be based, President Kevin O'Hara said. The combined company has about 4,900 jobs. The executives didn't talk about the possible number of job cuts.

Leucadia will retain the $236 million SBC is paying to end the contract, Level 3 said in the statement. Level 3 has had losses of $9.41 billion since 1998 as overbuilding caused a worldwide glut of fiber-optic network capacity.

Level 3 has $6.02 billion in debt, and the takeover will help reduce the company's cash obligation to repay that debt, Chief Executive Officer James Crowe said. "That's a big deal," he said.

Leucadia said it will have a gain of $150 million on the transaction, which is expected to close in the first quarter of 2006.