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Level 3 Looks East

The telecom company will buy Pennsylvania-based TelCove to expand its reach in the eastern U.S.
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Level 3 Communications

(LVLT)

signed a $1.24 billion deal to acquire TelCove, a privately held Pennsylvania-based telecom company.

Level 3 will pay $445 million in cash, $637 million in stock and assume $155.5 million in debt, the telecom outfit said Monday.

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The Broomfield, Colo.-based company said the deal will expand its reach in eastern U.S. metro areas. TelCove, which provides transport, Internet access and voice services, has a network of more than 22,000 miles of transmission lines serving 70 markets in the eastern U.S.

"The acquisition of TelCove increases our ability to provide end-to-end bandwidth services to our customers," said Level 3 Chief Executive James Crowe in a statement. "In addition to the contribution to operating margins, this additional metropolitan and regional capability will enable us to extend the network reach we offer to our customers and enable TelCove's customers to benefit from our national network and broad suite of IP-based services.

Level 3 said the addition of TelCove's metro markets will enable the company to increase its focus on its high-margin business. The company also said the deal should "meaningfully" reduce expenses paid to third parties for local access.

"TelCove's networks in key markets throughout the Eastern United States are complementary with Level 3's existing infrastructure, including the networks we have recently acquired through Progress Telecom and have agreed to acquire from ICG Communications," said President and Chief Operating Officer Kevin O'Hara.

Level 3 said TelCove is expected to generate $380 million to $400 million in stand-alone revenue in 2006. Level 3, which had revenue of $3.61 billion in 2005, said it expects about $75 million in integration costs related to the purchase.

The deal is expected to close in the third quarter.