The owner of the world's biggest telecom network is about to get even bigger.
Long-haul Internet provider Level 3 Communications Inc. LVLT -4.06% agreed to acquire rival TW Telecom for about $5.7 billion in cash and stock, merging the two companies' base of business customers as consolidation sweeps the communications sector.
"Our primary competitors are very large companies, whether they are incumbent telcos or cable companies," said Level 3 Chief Executive Jeff Storey during a conference call with analysts. "The combination is completely aligned with that."
The transaction adds to a raft of giant telecom mergers this year that could leave North America with fewer big service providers. AT&T Inc. T -0.14% and Comcast Corp. CMCSA -0.23% have both proposed multibillion-dollar takeovers that have blurred the lines between legacy telephone networks, cable companies and satellite-TV providers.
This deal brings together the global reach of Level 3's Internet backbone with the U.S. metropolitan focus of TW Telecom at a time when traffic from streaming videos from Amazon.com Inc. AMZN +0.41% and Netflix Inc. NFLX +0.60% to sensitive corporate data is increasing around the globe.
Level 3 has spent more than $25 billion in the last 15 years buying companies and building assets to string together 180,000 miles of fiber optic cable bridging more than 60 countries, in an attempt to gain scale to better compete with giant rivals like AT&T Inc. and Verizon Communications Inc. VZ +0.26% The purchase of TW Telecom represents Level 3's biggest, eclipsing the $1.9 billion it spent on Global Crossing Ltd. in 2011.
As its wholesale business shrinks, Level 3 has been seeking ways to bulk up its profitable segment serving corporate and government customers. The backbone serving its wholesale business is less profitable but physically much larger. That could lure more corporate customers by offering seamless links to Asia, Europe and Latin America.
"Scale matters," said TW Telecom Chief Executive Larissa Herda, who will step aside after the deal closes in the fourth quarter. "It helps drive lower costs and our ability to compete with large and growing competitors."
Still, Level 3 and TW Telecom together only hold about 6% of the fixed corporate communications market in the U.S., according to industry researcher International Data Corp. AT&T and Verizon together own nearly half.
The deal values TW Telecom at $40.86 a share, a 12% premium to Friday's close. Shareholders will receive $10 cash and 0.7 share of Level 3 for each share of TW Telecom. Level 3 will also take on about $1.6 billion of debt through the deal.
On Monday, shares of TW Telecom were up 7.3% to $38.99 on the Nasdaq National Market. Level 3's shares fell 4.1% to $42.30 on the New York Stock Exchange.
Despite its acquisitions, Level 3 hasn't made an annual profit since 1998 as the company faces plunging rates for long-distance Internet traffic. Last year, Level 3 reported a loss of $109 million on $6.3 billion in revenue. Its stock, meanwhile, has roughly doubled after years of belt-tightening.
Level 3 expects the deal with TW Telecom to cut costs by about $200 million a year.
Industry consolidation has made bandwidth prices more stable in recent years, said Level 3 Chief Financial Officer Sunit Patel in an interview, at least in the local markets where both companies offer to carry customers' sensitive corporate data.
Big corporations tend to ask a single telecom company to link their offices around the world, regardless of who owns the cables connecting them. Those customer demands often force providers like Level 3 to pay a competitor for connections into client's buildings. More than half of this deal's expected cost savings would stem from the combined company's ability to keep more network traffic in-house, Mr. Patel said.
Originally a joint venture of Time Warner Inc. TWX +1.00% and U.S. West started in 1993, TW Telecom made its public trading debut in 1999 as Time Warner Telecom Inc. Last year, activist investor Keith Meister of Corvex Management LP revealed a big stake in TW Telecom and said he thought the company was a likely takeover target, citing its ability to profit from heavier data use as consumers increase their use of mobile devices
TW Telecom last month reported improved quarterly revenue, helped by a big increase in data and Internet revenue, but profit declined on higher expenses.
The Level 3-TW Telecom deal is subject to approval from the Federal Communications Commission and state agencies, along with the shareholders of both companies. STT Crossing Ltd.—a unit of Singapore Technologies Telemedia Pte Ltd., which owns about 23% of Level 3's outstanding stock—has already entered a voting agreement with the companies.
—Lauren Pollock contributed to this article.
Corrections & Amplifications
Level 3 Communications Inc. spent more than $25 billion in the last 15 years buying companies and building assets. It also expects the TW Telecom deal to cut costs by about $200 million a year. An earlier version incorrectly stated Level 3 spent $40 billion buying companies and expected annual cost savings of $2.2 billion from the TW Telecom deal.