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Level 3 Buys East Coast Access For $1.2B

Level 3 Communications' buying spree of local fiber networks continues with a few twists.

The company paid $1.2 billion in cash and stock for TelCove, marking the communication wholesaler's entry into the profitable enterprise market.

The Colorado-based Level 3 also announced a new business unit to manage the four local companies purchased over the past six months.

The $1.2 billion price includes $637 million in Level 3 stock, $445 million in cash and $155.5 in TelCove debt.

TelCove provides fiber-based Internet, voice and data connections to 4,000 offices over 22,000 route miles and 70 East Coast markets. The privately held, Cannonsburg, Penn.-based company has $390 million in yearly revenue and employs more than 1,400 workers.

In addition to the fiber network, Level 3 acquired 300 wireless LMDS (Local Multipoint Distribution Services) and 39GHz licenses in 200 U.S. cities covering 90 percent of the population.

TelCove, formerly Adelphia Business Solutions, exited restructuring in April 2004. They have 14,000 customers and recently completed the acquisition of most of KMC Telecom. The company is now majority-owned by Bay Harbour Management, a New York investment firm.

The buy-out positions Bay Harbour to become "investors in a leading nationwide communications carrier," according to Doug Teitelbaum, who sits on the TelCove board of directors as well as being a Bay Harbour managing partner.

This is the fourth purchase of local fiber-optic providers by Level 3. In April, the Colorado-based IP backbone acquired ICG Communications, along with its Colorado and Ohio fiber connections.

In March, Level 3 snapped-up Progressive Telecomm's fiber-optic connections along the southeast U.S. In 2005, Level 3 bought WillTel Communications Group's nationwide fiber network.

Buying TelCove, Progressive, ICG and WillTel boosts Level 3's traffic connection points in the U.S. from 900 to around 5,000, according to a Level 3 statement.

What's different about the TelCove deal?

Unlike previous purchases which centered on cost savings from integrating overlapping operations, TelCove's metropolitan markets will lessen the amount of traffic terminated on networks it doesn't own.

The purchase will "meaningfully reduce expenses paid to third parties for local access," explained Kevin O'Hara, Level 3's president and CEO, in a statement.

To manage the recent company acquisitions, Level 3 also announced creation of a Metro Services Unit, combining services of TelCove and others under the Level 3 brand.

The trend toward more local acquisitions isn't likely to stop soon, according to one industry analyst. As a fiber wholesaler, "the aim is to drive up scarcity in the market and buying up competition," said David Willis of Gartner.

However, Level 3 is looking to possibly sell off TelCove's wireless spectrum, according to James Crowe, Level 3 CEO, during a conference call.

Although LMDS is experiencing some renewed interest from cellular providers and others seeking backhaul, the spectrum "is rapidly being eclipsed by WiMAX," according to Willis.