October 1, 2012 8:34 pm

TW Telecom seen considering sale

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TW Telecom (NASDAQ:TWTC) has been exploring a sale of the company, a source familiar with the matter and an industry source told dealReporter last week.

The Littleton, Colorado-based competitive local exchange carrier is working with Evercore Partners as its financial advisor, said the source and a second industry source. The first industry source said the process may have been going on for several weeks. Representatives for TW Telecom and Evercore did not return phone calls seeking comment.

CenturyLink (NYSE: CTL) is one of the parties talking to TW Telecom, said a separate source briefed on the matter, who suggested the two telecom firms could be near a deal. The first source and the second industry source said there has been chatter about a deal between CenturyLink and TW Telecom.

The source briefed cautioned a merger may not happen. The current status of the possible talks could not be learned.

On Monday, TW Telecom jumped over 4.5% on the back of dealReporter’s Friday story about the sale talks.

CenturyLink is only one of the companies that have spoken to TW Telecom about a possible deal, said the source familiar. Level 3 (NYSE:LVLT) also took interest, but TW Telecom’s high price makes it a large pill for any telecom firm to swallow, said this source.

Spokespeople for CenturyLink and Level 3 declined comment.

Several industry sources cited complications to any potential deal between TW Telecom and CenturyLink.

CenturyLink is rated investment grade by two rating agencies and just below by S&P. To complete a TW Telecom deal, CenturyLink would either have to put its credit rating on the “backburner” or offer TW Telecom stock with a mild debt component in order to make the transaction leverage neutral, said the second industry source. CenturyLink’s market capitalization is USD 25.4bn. It has long-term debt of USD 19.7bn.

TW Telecom’s equity is more attractive than CenturyLink’s, and the rural telecom operator would likely have to pay a steep premium to acquire the fiber-optic network operator, the second industry source continued. A TW Telecom acquisition, however, would bolster CenturyLink’s enterprise and small business services and support its past acquisition of Savvis, the two industry sources said.

On 27 September, TW Telecom completed a USD 480m bond offering, with plans to use the funds to settle conversion obligations on its 2 3/8% convertible senior notes due 2026. It would be “highly unusual” for a company to raise debt right before a sale, cautioned a third industry source. The first industry source said a bond offering is unusual but does not make a deal impossible.

TW Telecom’s shares have appreciated considerably since the start of the year. The rise in share price and financial incentives to sell among the company’s executives are the two primary factors why TW Telecom has chosen now to seek an exit, said the source briefed. TW Telecom, moreover, has always maintained a history of shying away from M&A, in part to keep its operations clean for a sale, he said.

In 2006, TW acquired Xspedius Communications for USD 530m. Evercore advised TW Telecom on the transaction.

CenturyLink is interested in TW Telecom as a continuation of its policy of gaining scale through M&A, the source briefed said. It acquired data center operator Savvis for USD 2.3bn in 2011, regional Bell operating company Qwest for USD 10.5bn in 2011, and rural local exchange carrier Embarq for USD 5.7bn in 2009.

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