Level 3 grabs TelCove in buying spree

Level 3 Communications Inc. has expanded its network to cover additional U.S. cities by announcing Monday that it agreed to pay $1.2 billion to acquire TelCove Inc.

TelCove is a privately held telecommunications company in Canonsburg, Pennsylvania, that generates $390 million in annual revenue by delivering Internet access and voice services. It has a network of 22,000 route miles, serving 3,900 buildings in 70 markets across the eastern U.S.

To take over that network, Level 3 will pay $445 million in cash, assume $155.5 million in debt and buy $637 million of TelCove stock.

The acquisition will allow Level 3 to reach new customers, and to offer existing customers an extended network, Level 3 Chief Executive Officer James Q. Crowe said in a news release.

Level 3 has been buying regional carriers in order to use their networks to create “traffic aggregation points” that combine factors like competing 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.

This is the third acquisition within five weeks by Level 3, of Broomfield, Colorado. The company announced in March it had bought Progress Telecom LLC of St. Petersburg, Florida, and said in April it had agreed to buy ICG Communications Inc. of Colorado.

After buying Progress Telecom, TelCove and ICG, Level 3 will increase its number of traffic aggregation points in the U.S. from 900 to 5,000.

Level 3 gains competitive advantage against other carriers by creating these points when it connects its national backbone network to regional networks, the company said.

Level 3 executives said there would not be many layoffs among TelCove’s 1,400 employees. The company has profited through past acquisitions by eliminating duplicated costs, but it plans to use TelCove’s existing network to reach new customers, Level 3’s President and Chief Operating Officer Kevin O’Hara said in the release.

“This deal makes sense for Level 3,” said Jeff Kagan, a telecom industry analyst. “It helps Level 3 get further into the local competitive market as a competitive local exchange carrier. It is not the first, and will not likely be the last deal Level 3 does.”

Level 3 is not alone; the entire industry is in the middle of a hot merger and acquisition period. Kagan said.

“This is one of many telecom deals that we will see this year. The outlook for the telecom industry continues to look healthy as the industry transforms itself.”

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