Updated from 11:20 a.m. EST

Telecommunications provider

McLeodUSA

(MCLD)

Friday agreed to buy fellow competitive local exchange carrier

Splitrock Services

(SPLT)

for $2.1 billion in stock and debt.

Splitrock shareholders will receive 0.5347 newly issued McLeodUSA shares, valuing the deal at $30.50 per Splitrock share based on the average closing price for the last five trading days of McLeodUSA shares, the company said. McLeod, based in Cedar Rapids, Iowa, closed Thursday trading at 52 9/16, down 2 11/16 or 4.9%. Splitrock, based near Houston, closed at 22 1/8, up 1 1/8, or 5.4%.

Wall Street viewed the deal as favorable for both companies. Splitrock was up 4 5/8, or 21%, to 26 3/4 in Friday morning trading, while McLeod was up 3/8, or .71%, to 52 7/8. (McLeod ended Friday up 11/16, or 1%, to 53 1/4, while Splitrock settled Friday up 5, or 23%, to 26 15/16.)

After the transaction closes, expected in the second quarter, Splitrock shareholders will own about 12.6% of McLeodUSA on a fully diluted basis.

"This is another example of industry consolidation," said Joe Savage, vice president of research at telecommunciations research firm

RHK

. "CLECs have been popping up like mushrooms and they are looking to merge and build a larger footprint." CLECs proliferated after passage of the 1996 Telecommunications Act, which allows local phone companies to offer long distance service if they can prove their home markets are open.

With the acquisition, McLeodUSA can go beyond its current voice offerings and offer data services, including Internet access, to its customers over the Splitrock network. McLeodUSA's customers are located in 21 states in the Midwest and Rocky Mountain areas.

"With this transaction, we have acquired the data and network expertise to accelerate our delivery of comprehensive data products by 18 to 36 months," Stephen Gray, McLeodUSA president, said in a statement, "while reducing our capital expenditure for network construction."

The company also announced that Roy Wilkens will join McLeodUSA as head of the data services operations, including the Splitrock business.

A breakup fee of about $68 million will apply under certain circumstances, according to the company.

Salomon Smith Barney

is acting as McLeodUSA's financial adviser, while

Credit Suisse First Boston

is advising Splitrock on the deal.