Level 3’s Metro Makeover

Update: With a million metro fiber miles, Level 3 metro make over is way underway. I totally flubbed this one, and would like to apologize. PT will add 5% to this total. (network map is here!) What percentage is LVLT owned and how much is through IRU is still unclear. Please, if you have any information, do drop me a note or post a comment.

Level 3 Communications, for almost all its business life has been a long haul bandwidth provider, a business that has been ravaged by over capacity and precipitous price declines. Having barely survived the telecom bust, Colorado-based company is now trying rapidly diversifying to diversify into the metro network business. The big metro makeover is starting gathering momentum with Progress Telecom, a joint venture of Odyssey Telecom and the telecom division of Florida-based power utility, Progress Enery. Level 3 today announced that it was buying PT for roughly $137 million, half of it in cash, and half of it in stock. This will add to its million mile metro network, which is operational in some of the major markets.

Progress Telecom’s network spans 9,000 miles, includes 29 metro networks and connects to international cable landings in South Florida and 31 mobile switching centers in the southeast. Progress Telecom serves approximately 200 customers with a significant concentration of international and wireless carrier customers. The demand for bandwidth is growing rapidly in metro circles chiefly because of 3G rollouts by wireless carriers. In addition, the increased number of mobile subscribers is helping stabilize the prices for bandwidth in the metro markets. Before Progress, Level 3 had limited metro presence in cities like San Francisco and Chicago. One point to note: the deal doesn’t include the Progress Telecom’s tower business, though Level 3 will continue to provide connectivity to these towers.

“Progress Telecom currently generates annualized revenue of approximately $70 million and approximately $7 million of annualized positive free cash flow,” said Sunit S. Patel, chief financial officer Level 3 Communications. “We expect to begin to realize most of the cost synergy benefits during 2007 and as a result, we expect annualized cash flow to improve to approximately $30 to $35 million once we have completed the integration,” added Patel. “We expect a cash-on-cash breakeven for this transaction of approximately three years, excluding potential revenue synergies.”

It is now positioned with metro circles in fast growth South-East US markets like Florida, Georgia and Virginia. The new fiber aside, Level 3 will be able to add approximately $70 million in revenues and approximately $7 million of annualized positive free cash flow from the PT business. If this deal is going to help Level 3, it is also good news for Sean Doherty, a former @Home executive who was part of my story, The Pragmatics: telecom’s survivors, in the old Red Herring. Sean had started Odyssey back during the telecom bust, at a time when most people were hitting the exits. He had basically decided that because everyone was dumping, and prices were falling, it was time to pick up bargains. He did, and in December 2002 bought his first fiber company, EPIK Communications. Days before that company was going to be auctioned off. In December 2003, he merged EPIK with Progress Telecom.  Funnily enough, Sean had once told me that he actually got paid to take EPIK off the investors hand. Well, three years and patience has turned that into a whole lotta dollars.