Exhibit 99.1
[Logo]
1025 Eldorado Boulevard
Broomfield, Colorado 80021
www.Level3.com
NEWS RELEASE
Level 3 contacts:
Media: Josh Howell Investors: Robin Grey
720-888-2517 720-888-2518
Chris Hardman Sandra Curlander
720-888-2292 720-888-2501
Level 3 to Acquire TelCove
Purchase Price of $1.2375 Billion Includes $637 Million in Shares of Level 3
Common Stock, $445 Million in Cash and the Assumption of $155.5 Million in Debt
Acquisition Expands Level 3's Network Reach in
Key Metropolitan Regions in Eastern U.S.
BROOMFIELD, Colo., May 1, 2006 -- Level 3 Communications, Inc. (Nasdaq:LVLT)
today announced that it has signed a definitive agreement to acquire TelCove,
Inc., a privately held Pennsylvania-based telecommunications company. Under
terms of the agreement, Level 3 will pay total consideration of $1.2375 billion,
consisting of $637 million in shares of Level 3 common stock, $445 million in
cash and $155.5 million in the assumption of debt.
TelCove is a leading facilities-based provider of metropolitan and regional
communications services including transport, Internet access and voice services.
TelCove's network has over 22,000 local and long haul route miles serving 70
markets across the eastern United States, with approximately 4,000 buildings on
net. TelCove has annual revenues of about $390 million and Adjusted OIBDA of
about $130 million. As part of the transaction, Level 3 will be acquiring over
300 LMDS and 39 GHz licenses covering 90 percent of the population of the United
States.
"The acquisition of TelCove increases our ability to provide end-to-end
bandwidth services to our customers," said James Q. Crowe, chief executive
officer of Level 3. "In
addition to the contribution to operating margins, this additional metropolitan
and regional capability will enable us to extend the network reach we offer to
our customers and enable TelCove's customers to benefit from our national
network and broad suite of IP-based services.
"It has been a pleasure working with Doug Teitelbaum and Kurt Cellar of Bay
Harbour Management as we worked to conclude this agreement, and we look forward
to working with Bob Guth and the management team at TelCove in the coming months
and years."
"Bay Harbour Management has been the controlling shareholder of TelCove for two
years. Our team, headed by Kurt Cellar, has worked closely with TelCove to
nurture growth through significant capital investment and acquisitions," said
Doug P. Teitelbaum, managing partner of Bay Harbour Management, LC. "This merger
with Level 3 accomplishes our goals by positioning us to be investors in a
leading nationwide communications carrier."
"TelCove's metro fiber assets are among the most robust in the industry, and we
have an outstanding base of loyal and satisfied customers who will benefit
greatly from this acquisition, and a team of dedicated employees who are excited
to play a key role in this unfolding vision," said Bob Guth, president and chief
executive officer at TelCove. "This is a great day for all TelCove stakeholders,
and a significant step by Level 3 that will drive real choice to customers on a
national basis."
After integration, TelCove's metropolitan and regional networks will connect
Level 3's national backbone network directly to traffic aggregation points.
These aggregation points include other carriers' points of presence, local
telecommunications companies' central offices, wireless providers' switch
centers, colocation and data centers, cable company head ends, and
high-bandwidth enterprise locations. Before the pending acquisitions of TelCove
and ICG Communications and the completed acquisition of Progress Telecom, Level
3 already had extensive metro infrastructure in 36 markets, connecting to
approximately 900 traffic aggregation points, and Level 3 believes that these
facilities have been a source of considerable competitive advantage. The
acquisition of Progress and, after close, of TelCove and ICG Communications will
increase the number of traffic aggregation points to approximately 5,000 in the
U.S. and approximately 5,200 globally.
"Expanding Level 3's existing position as a metro service provider will allow us
to further meet our growing customer demand," said Kevin O'Hara, president and
chief operating officer of Level 3. "The addition of TelCove's metro markets
will enable us to increase our focus on on-net, high-margin business. In
addition, this acquisition should meaningfully reduce expenses paid to third
parties for local access.
"TelCove's networks in key markets throughout the Eastern United States are
complementary with Level 3's existing infrastructure including the networks we
have recently acquired through Progress Telecom and have agreed to acquire from
ICG Communications.
"In order to assure the attention that is necessary to fully leverage Level 3's
metro assets, we have formed Level 3 Metro Services, a separate business unit
with the appropriate management, sales and technical resources at the local
level to ensure a clear focus on those markets," said O'Hara.
"For the full year 2006, TelCove standalone is expected to generate
approximately $380 million to $400 million of annualized revenue and
approximately $125 million to $135 million of annualized Adjusted OIBDA," said
Sunit S. Patel, chief financial officer of Level 3 Communications. "TelCove's
annual revenue growth rate is expected to average approximately 10 to12 percent
and with gross margins over 80 percent.
"We expect integration costs of approximately $75 million which comprises about
$25 million in operating expenses and $50 million in capital expenditures. Most
of the integration expenses will be incurred in 2007. We expect TelCove's 2007
Adjusted OIBDA to be approximately $150 million, improving to approximately $220
million in 2008 upon completion of integration. Capital expenditures, before
integration, are expected to range between 20 percent and 25 percent of
annualized revenue after 2006. The addition of TelCove's high-margin revenues
enhance our margin profile and improve our financial leverage."
"The integration model for TelCove is different than a number of other
acquisitions Level 3 has completed, where synergies were driven through the
elimination of overlapping facilities and duplicative costs," said O'Hara.
"While certain functions will be integrated and some positions eliminated, the
primary drivers of value are opportunities to reduce Level 3's network related
expenses and to increase sales to existing and new customers.
"We will immediately begin integration planning to the extent permitted by
applicable law. With our experience and expertise in integration activities, we
believe that we are well positioned for a smooth integration process."
The number of shares of Level 3's common stock to be delivered at closing will
determined by dividing $637 million by Level 3's volume-weighted average share
price for the ten trading days ending on the trading day immediately preceding
the fourth trading day prior to closing, but in no case will the number of
shares that Level 3 is required to deliver at closing be greater than
approximately 166 million shares or less than approximately 111 million shares.
Closing is subject to customary conditions, including receipt of applicable
state and federal regulatory approvals, and is also subject to a vote to approve
an increase in the number of authorized shares of Level 3's common stock, which
is scheduled to occur at Level 3's annual stockholder meeting on May 15, 2006.
The holders of more than a majority of TelCove's stock have irrevocably approved
the transaction and therefore the transaction is not subject to any additional
approvals by TelCove's security holders. Closing is expected to occur in the
third quarter of 2006.
Level 3 will hold an investor and media conference call today to discuss the
announcement at 10:00 a.m. Eastern Time. To join the call, please dial
(612) 332-0228. A live broadcast of the call can also be heard on Level 3's Web
site at www.level3.com. An
audio replay of the call will be accessible through the Web site or by dialing
(320) 365-3844 - Access Code 827959.
Level 3 was advised by Morgan Stanley and Willkie Farr & Gallagher LLP.
TelCove was advised by Merrill Lynch & Co., Houlihan Lokey Howard and Zukin and
Akin Gump Strauss Hauer & Feld LLP in connection with the merger.
About Level 3 Communications
Level 3 (Nasdaq: LVLT), an international communications and information services
company, operates one of the largest Internet backbones in the world. Through
its customers, Level 3 is the primary provider of Internet connectivity for
millions of broadband subscribers. The company provides a comprehensive suite of
services over its broadband fiber optic network including Internet Protocol (IP)
services, broadband transport and infrastructure services, colocation services,
voice services and voice over IP services. These services provide building
blocks that enable Level 3's customers to meet their growing demands for
advanced communications solutions. The company's Web address is www.Level3.com.
Level 3 offers information services through its subsidiary, Software Spectrum,
and fiber-optic and satellite video delivery and advertising distribution
solutions through its subsidiary, Vyvx. For additional information, visit their
respective Web sites at www.softwarespectrum.com and www.vyvx.com.
The Level 3 logo is a registered service mark of Level 3 Communications, Inc. in
the United States and/or other countries. Level 3 services are provided by a
wholly owned subsidiary of Level 3 Communications, Inc.
Forward-Looking Statement
Some of the statements made by Level 3 in this press release are forward-looking
in nature. Actual results may differ materially from those projected in
forward-looking statements. Level 3 believes that its primary risk factors
include, but are not limited to: increasing the volume of traffic on Level 3's
network; developing new products and services that meet customer demands and
generate acceptable margins; successfully completing commercial testing of new
technology and information systems to support new products and services,
including voice transmission services; stabilizing or reducing the rate of price
compression on certain of our communications services; integrating strategic
acquisitions; attracting and retaining qualified management and other personnel;
ability to meet all of the terms and conditions of our debt obligations;
overcoming Software Spectrum's reliance on financial incentives, volume
discounts and marketing funds from software publishers; and reducing downward
pressure of Software Spectrum's margins as a result of the use of volume
licensing and maintenance agreements. Additional information concerning these
and other important factors can be found within Level 3's filings with the
Securities and Exchange Commission. Statements in this release should be
evaluated in light of these important factors.
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Non-GAAP Metrics
Pursuant to Regulation G, the company is hereby providing a reconciliation of
non-GAAP financial metrics to the most directly comparable GAAP measure.
The company provides projections that include non-GAAP metrics that the company
deems relevant to management and investors. These non-GAAP metrics are Adjusted
OIBDA, gross margin, Adjusted OIBDA margin, unlevered cash flow and consolidated
free cash flow. The following reconciliations of these non-GAAP financial
metrics to GAAP include forward-looking statements with respect to the
information identified as a projection. Level 3 has made a number of assumptions
in preparing our projections, including assumptions as to the components of
financial metrics. These assumptions, including dollar amounts of the various
components that comprise a financial metric, may or may not prove to be correct.
We caution you that these forward-looking statements are only predictions, which
are subject to risks and uncertainties including technological uncertainty,
financial variations, changes in the regulatory environment, industry growth and
trend predictions. Please see the company's Annual Report on Form 10-K for a
description of these risks and uncertainties.
In order to provide projections with respect to non-GAAP measures, we are
required to indicate a range for GAAP measures that are components of the
reconciliation of the non-GAAP metric. The provision of these ranges is in no
way meant to indicate that the company is explicitly or implicitly providing
projections on those GAAP components of the reconciliation. In order to
reconcile the non-GAAP financial metric to GAAP, the company has to use ranges
for the GAAP components that arithmetically add up to the non-GAAP financial
metric. While the company feels reasonably comfortable about the projections for
its non-GAAP financial metrics, it fully expects that the ranges used for the
GAAP components will vary from actual results. We will consider our projections
of non-GAAP financial metrics to be accurate if the specific non-GAAP metric is
met or exceeded, even if the GAAP components of the reconciliation are different
from those provided in an earlier reconciliation.
Gross Margin ($) is defined as revenue less cost of revenue from the
consolidated condensed statements of operations.
Cost of Revenue for the business includes leased capacity, right-of-way costs,
access charges and other third party circuit costs directly attributable to the
network, as well as costs of assets sold pursuant to sales-type leases. Cost of
revenue also includes satellite transponder lease costs, package delivery costs
and blank tape media costs attributable to the video business.
Gross Margin (%) is defined as gross margin ($) divided by revenue. Management
believes that gross margin is a relevant metric to provide to investors, as it
is a metric that management uses to measure the margin available to the company
after it pays third party network services costs; in essence, a measure of the
efficiency of the company's network.
Adjusted OIBDA is defined as operating income from the consolidated condensed
statements of operations, plus depreciation and amortization plus non-cash
impairment charges plus non-cash stock compensation expense.
Adjusted OIBDA Margin is defined as Adjusted OIBDA divided by revenue.
Management believes that Adjusted OIBDA and Adjusted OIBDA Margins are relevant
and useful metrics to provide to investors, as they are an important part of the
company's internal reporting and are indicators of profitability and operating
performance, especially in a capital-intensive industry such as
telecommunications. Management also uses Adjusted OIBDA and Adjusted OIBDA
Margins to compare the company's performance to that of its competitors.
Adjusted OIBDA excludes non-cash impairment charges and non-cash stock
compensation expense due to the company's adoption of the expense recognition
provisions of SFAS No. 123R. Additionally, Adjusted OIBDA excludes interest
expense and income tax expense and other gains/losses not included in operating
income. Excluding these items eliminates the expenses associated with the
company's capitalization and tax structures. Adjusted OIBDA excludes
depreciation and amortization expense in order to eliminate the impact of
capital investments which management believes should be evaluated through
consolidated free cash flow.
There are limitations to using non-GAAP financial measures, including the
difficulty associated with comparing companies that use similar performance
measures whose calculations may differ from the company's calculations.
Additionally, this financial measure does not include certain significant items
such as depreciation and amortization, interest expense and non-cash impairment
charges. Adjusted OIBDA and Adjusted OIBDA Margin should not be considered a
substitute for other measures of financial performance reported in accordance
with GAAP.
Projected Adjusted OIBDA Pre-acquisition 2006
Twelve Months Ended December 31, 2006 Range
($ in millions)
Low High
Net Earnings/(Loss) $(2) $8
Plus Other (Income)/Expense $20 $10
Operating Income/(Loss) $18 $18
Plus Depreciation and Amortization Expense $105 $115
Plus Non-Cash Stock Compensation Expense $2 $2
Adjusted OIBDA $125 $135
Projected Adjusted OIBDA Post-Acquisition
Twelve Months Ended December 31, 2007 and 2008
($ in millions)
2007 2008
Net Earnings/(Loss) ($67) ($7)
Plus Other (Income)/Expense $35 $35
Operating Income/(Loss) ($32) $28
Plus Depreciation and Amortization Expense $180 $190
Plus Non-Cash Stock Compensation Expense $2 $2
Adjusted OIBDA $150 $220
The figures provided for depreciation and amortization in reconciling Adjusted
OIBDA with net earnings/loss are estimates and could vary significantly from the
depreciation and amortization costs determined after the Company completes its
purchase price allocation in accordance with GAAP.