Level 3 buys TelCove

Level 3 Communications is getting into the CLEC business, creating a new metro services business based largely on its most recent acquisition, the $1.2375 billion purchase of regional CLEC TelCove.

"This is a return to the CLEC business for many of us at Level 3 – we came from MFS," said CEO James Crowe. "We are familiar with this business in our bones."

The combined revenues of TelCove and two previously announced acquisitions -- Progress Telecom and ICG -- approach $750 million, Crowe said, "and that makes us one of the largest CLECs in America. Our financial performance certainly means we have industry leading margins and we intend to keep that position," Crowe said.

Level 3 will differentiate itself in the CLEC space by focusing on IP-based services, he added.

With today's acquisition announcement, Level 3 is creating a Metro Services business, into which TelCove, ICG and Progress Telecom assets will be integrated. Instead of integrating TelCove into Level 3, as the company has done in the past, President and COO Kevin O'Hara said, it will retain most of TelCove's assets separately as the core of its Metro Services business, and elminate mostly top corporate functions.

"More of value will be driven by the reduction in third-party expenses," he said. "The networks will be interconnected, but not all functions will be integrated into core Level 3. Much of activities of Progress Telecom and ICG will be integrated into TelCove."

The integration of the networks will eliminate payments to incumbent LECs for access lines, he said, and generate new traffic for Level 3's core network.

Crowe said Level 3 will continue to serve its wholesale customers, including the cable companies, wireless carriers, VoIP providers and others, as it also increases its focus on bandwidth-intensive enterprise customers with its new metro business.

In addition to acquiring TelCove’s 22,000 route-mile metro fiber network, connecting 4000 buildings in 70 markets in the Eastern U.S., Level 3 also gets broadband wireless licenses in the 31 GigaHertz and 39 GigaHertz spectrum in 200 markets covering 90% of the U.S. population.

Crowe said Level 3 will "look long and hard" at the wireless spectrum before deciding what to do with it, and didn't rule out selling it.

The TelCove purchase price includes $637 million of Level 3 stock and an additional $445 million in cash. It also will assume $156 million in debt. The stock price used in the sale will be based on a complex formula using a 10-day average price.

The deal is the fourth acquisition for Level 3 in recent months, following its acquisition of long-distance player WilTel Communications Group, as well as regional carrier Progress Telecom and ICG Communications.

TelCove’s network was built by Adelphia Cable and once operated at Adelphia Business Solutions before its spinoff and renaming. For the last two yaers, Bay Harbour Management has been the controlling shareholder.