Both Roger Cheng at WSJ and Evelyn Rusli of the NY Times warn of higher backbone prices if the government allows the merger. There's no other logical reason to pay $3B for a company that has lost money for each of the last four years. Jim Crowe of Level 3 is claiming there will be $300M of "savings" even though the total SG&A was $431M. Much of that is sales and support that need to continue, I can't see anywhere for him to find a return like that except in higher pricing. (Global Crossing less of a backbone)

Pricing dynamics on the backbone are sufficiently complicated I put the question mark in the title. I haven't done enough analysis to join in the conclusion. It's almost definitely right to stop the deal but that's highly unlikely. One of the fortunate accidents of policy is that we've had enough players on the backbone to allow competition to do its magic. If that's no longer true, in the absence of strong regulation we'll see high prices and diminished Internet growth.

Jim Crowe of Level 3 is one of the great salesmen of the era. He has a reality distortion field among investors although he's lost big money for a decade. One of Jim's problems is self-delusion. Long after Andrew Odlyzko had proven the Internet was not doubling every 120 days, Jim was touting that error to Wall Street. I think he believed it.

Level 3-Global Crossing Merger Likely Approved But Lots of Cooks in the Kitchen

• Our preliminary sense is that U.S. government antitrust and regulatory agencies are likely to approve Level 3’s (LVLT) acquisition of Global Crossing (GLBC), announced this morning. We would expect the issues of concern would be the impact of the deal on particular local markets and on particular international submarine cable routes, where there could be the possibility of divestitures.

• We note that some past mergers involving tier-one Internet backbone providers have been blocked or required significant divestitures, e.g., MCI-WorldCom (MCI was required to divest backbone to Cable and Wireless); WorldCom-Sprint (deal blocked because of concern about long-haul market concentration, including in the backbone market); and Bell Atlantic-GTE (merger approved on condition that GTE divest its backbone network to Genuity).

Level 3 to Acquire Global Crossing

Combination Creates a Premier Global Communications Provider with Extensive Network Reach, Global Scale and a Comprehensive Service Portfolio to Deliver Enhanced Capabilities to Customers

Transaction Creates Significant Value through Synergies; Results in Substantial Improvement to Balance Sheet and Credit Profile

Expected to Be Accretive to Level 3 on a Free Cash Flow Per Share Basis in 2013

Combination Will Position Level 3 to Better Address Expansion Opportunities in Key Global Markets

BROOMFIELD, Colo. and FLORHAM PARK, N.J., April 11, 2011 – Level 3 Communications, Inc. (NASDAQ: LVLT) and Global Crossing Limited (NASDAQ: GLBC) today announced that they have entered into a definitive agreement under which Level 3 will acquire Global Crossing in a tax-free, stock-for-stock transaction. The combined company will operate a unique global services platform anchored by fiber optic networks on three continents, connected by extensive undersea facilities. The combined network will serve a worldwide customer set with owned network in more than 50 countries and connections to more than 70 countries. This transaction will create a company with pro forma combined 2010 revenues of $6.26 billion and pro forma combined 2010 Adjusted EBITDA of $1.27 billion before synergies and $1.57 billion after expected synergies.

Under the terms and subject to the conditions of the agreement, Global Crossing shareholders will receive 16 shares of Level 3 common stock for each share of Global Crossing common stock or preferred stock that is owned at closing. Based on Level 3’s closing stock price on April 8, 2011, the transaction is valued at $23.04 per Global Crossing common or preferred share, or approximately $3.0 billion, including the assumption of approximately $1.1 billion of net debt as of Dec. 31, 2010. Global Crossing has approximately 79 million basic and preferred shares outstanding and approximately 83 million shares outstanding on a fully diluted basis, giving effect to outstanding stock awards, but excluding performance-based stock grants.

The transaction will create a company with a unique capability to meet local, national and global customer requirements in a wide range of markets. By combining the strengths of each company, the new entity will offer enterprise, government, wholesale, content, and web-based customers a comprehensive portfolio of end-to-end data, video and voice solutions.

“This is a transformational combination that we believe will deliver significant value to the investors, customers and employees of both Level 3 and Global Crossing,” said Jim Crowe, chief executive officer of Level 3. “The complementary fit between the two companies’ networks, service portfolios and customers is compelling. By leveraging the respective strengths and extensive reach of both companies, we are creating a highly efficient and more extensive global platform that is well-positioned to meet the local and international needs of our customers.”

“This transaction will provide Global Crossing shareholders with an attractive premium and significant participation in the upside potential of a leading communications company with industry-leading scale and capabilities. The combined service capabilities, extensive network assets and talented employees of the two companies will create a stronger global communications competitor with compelling offerings in the marketplace,” said John Legere, chief executive officer of Global Crossing. “Each of our companies has a reputation for being nimble and flexible in meeting customers’ communications needs, and we expect that to continue – with the added benefit of offering customers significantly greater reach, products and services.”

“We’re looking forward to welcoming Singapore Technologies Telemedia, Global Crossing’s largest shareholder, as a significant investor,” said Crowe. “They are exceptionally sophisticated managers, with holdings in telecommunications and information companies in a number of countries. They know the technology and they know the industry. The breadth of their communications experience and their knowledge of international markets will be a great asset to us.”

“This strategic combination is an important milestone for both Global Crossing and Level 3, and a value-creating proposition for all stakeholders,” said Lee Theng Kiat, president and chief executive officer of Singapore Technologies Telemedia (ST Telemedia). “Going forward, we believe the combined strengths of the two companies will position it in a very favorable, competitive position to expand in the U.S. and compete globally.”

“We are committed to creating a high-performing combined business through a carefully managed integration plan executed by a select team from both companies,” said Jeff Storey, president and chief operating officer of Level 3. “We will begin integration planning immediately and bring an aggressive, disciplined approach to the process. After the closing, as we integrate the two operations and work to achieve our expected synergies, we will be dedicated to maintaining our focus on providing excellent customer service and growing our combined revenues.”

“The combination improves our balance sheet and credit profile immediately upon closing with further improvement as we achieve the benefits of integration. Additionally, the transaction accelerates the achievement of Level 3’s target leverage ratio of three to five times debt to Adjusted EBITDA,” said Sunit Patel, chief financial officer of Level 3. “Including the benefit of synergies and the cost of integration, we expect the transaction to be accretive to Level 3’s Free Cash Flow per share in 2013 and to give us the financial strength to capitalize on the many opportunities available in the global market.”

Benefits of the Transaction

Significant Synergy Opportunities

Through integration of the combined businesses, the transaction is expected to create substantial annualized Adjusted EBITDA synergies of approximately $300 million and annualized capital expenditure reduction of approximately $40 million. Level 3 expects to realize approximately two-thirds of the run rate Adjusted EBITDA synergies within 18 months of closing. The company estimates that the net present value of the potential synergies will be approximately $2.5 billion. Of the total expected synergies, approximately 39 percent are from network expense savings, approximately 49 percent from operating expense savings, and approximately 12 percent are from reductions in capital expenditures. The company expects to incur approximately $200 to $225 million of integration costs associated with this transaction. Approximately 55 percent of those costs are expected to be from operating expenses, and 45 percent are expected to be from capital expenditures to support integration activities.

Improved Financial Strength of Combined Business

Including the benefit of synergies and the cost of integration, the transaction is expected to be accretive to Level 3’s Free Cash Flow per share in 2013. As a result of potential revenue growth and synergies, over the longer term, Level 3 expects to have significant Free Cash Flow available for investment in high-return opportunities, including U.S. and international network expansions, and potential repurchase of the company’s securities.

Improvement to Level 3’s Credit Profile

The transaction is expected to improve Level 3’s credit profile as well as significantly strengthen the company’s balance sheet. On a pro forma basis and including the benefit of expected synergies, the ratio of net debt (including capital leases) to Adjusted EBITDA is expected to improve from 6.8x to 4.4x as of Dec. 31, 2010.

Expanded Global Footprint

Existing customers will benefit from expanded geographic reach and a combination of intercity networks and metro networks throughout North America, Latin America and Europe connected by extensive global subsea networks. The combined business will leverage Global Crossing’s long-term IRU’s on the PC1 and EAC cable systems, focusing on telecom operators based in Asia. The combined network will serve a worldwide customer set with owned network in more than 50 countries and reach to more than 70 countries.

Enhanced and Expanded Service Portfolio

The combined business will offer an extensive portfolio of transport, IP and data solutions, content delivery, data center, colocation and voice services, delivered globally. Global Crossing will bring important additions to Level 3’s service portfolio, including managed services, collaboration services and inter-continental virtual private networking capability. The combined service portfolio and distribution channels will allow Level 3 to better address the needs of enterprises, content providers, carriers and governments throughout North America, Latin America and Europe.

Expanded Enterprise Service Capabilities

Global Crossing’s enterprise service portfolio and proven sales expertise together with the improved cost structure and performance achievable by combining the extensive international, intercity and metro networks will enable opportunities for improved growth by giving enterprises better options to meet their local, national and international communications needs.

Committed Financing

Level 3 Financing, Inc., a wholly owned subsidiary of Level 3, has received committed financing for $1.75 billion in connection with this acquisition.

Voting Agreement and Stockholder Rights Agreement

In conjunction with this transaction, Level 3 has signed a Voting Agreement with ST Telemedia, the company which owns approximately 60 percent of Global Crossing’s stock, whereby ST Telemedia has agreed to vote its shares in favor of the transaction, subject to certain terms and conditions. Level 3 and ST Telemedia have also signed a Stockholder Rights Agreement, which becomes effective upon closing and which allows ST Telemedia to designate members to the Level 3 board of directors, proportionate to their stock ownership. In addition, the Stockholder Rights Agreement contains a standstill provision which imposes limitations on ST Telemedia’s ability to purchase or sell Level 3 common stock.

Approvals and Timing of Transaction

In addition to customary closing conditions, the transaction is subject to regulatory approvals relating to competition law, licensing, financing, and foreign ownership, including approvals by the U.S. Department of Justice, the U.S. Federal Communications Commission and other regulatory agencies in the U.S. and in countries where the companies do business. The transaction is also subject to the approval of the stockholders of each company. The transaction is expected to close before the end of this year.

Stockholder Rights Plan

Level 3 also announced separately today that it is adopting a Stockholder Rights Plan (Rights Plan). The Rights Plan is designed to protect Level 3’s federal Net Operating Losses (NOLs) from the effect of Internal Revenue Code Section 382, which can restrict the use of NOLs. The completion of the business combination with Global Crossing would move Level 3 significantly closer to the 50 percent ownership change outlined in Section 382, and increase the likelihood of a loss of Level 3’s valuable NOLs. The rights under the Rights Plan will expire under the circumstances described in the separate release announcing its adoption. In addition, Level 3’s board of directors intends, from time to time (and in particular upon the closing of the transaction), to consider whether maintaining the Rights Plan continues to be in the best interests of Level 3.

Advisors

BofA Merrill Lynch, Citi and Morgan Stanley acted as advisors to Level 3, and Rothschild provided a fairness opinion. Willkie Farr & Gallagher LLP acted as legal counsel to Level 3. Goldman, Sachs & Co. acted as financial advisor and Latham & Watkins acted as legal counsel to Global Crossing. Credit Suisse Securities (USA) LLC acted as financial advisor to ST Telemedia.

Fast Net News, DSL Prime, DOCSIS Report

Level 3 to Acquire Global Crossing