Filed by Level 3 Communications, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 under the
Securities Exchange Act of 1934
Subject Company: Broadwing Corporation
Commission File No.: 0-30989
Date: October 17, 2006
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to, (i) statements about the benefits of
the acquisition of Broadwing by Level 3, including financial and operating
results and synergy benefits that may be realized from the acquisition; Level
3's and Broadwing's plans, objectives, expectations and intentions and other
statements contained in this presentation that are not historical facts; and
(ii) other statements identified by words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" or words of similar
meaning. These forward-looking statements are based upon management's current
beliefs or expectations and are inherently subject to significant business,
economic and competitive uncertainties and contingencies and third-party
approvals, many of which are beyond our control. The following factors, among
others, could cause actual results to differ materially from those described in
the forward-looking statements: (1) whether the stockholders of Broadwing
approve the proposed transaction; (2) the satisfaction of the other conditions
specified in the merger agreement, including without limitation the receipt of
required governmental approvals of the proposed transaction; (3) the ability to
successfully combine the businesses of Level 3 and Broadwing; (4) the
realization of revenue and cost synergy benefits from the proposed transaction;
and (5) operating costs, customer loss and business disruption following the
merger, including adverse effects on relationships with employees. Other
important factors that may affect Level 3's and the combined business' results
of operations and financial condition include, but are not limited to:
increasing the volume of traffic on Level 3's network; developing new products
and services that meet customer demands and generate acceptable margins;
successfully completing commercial testing of new technology and information
systems to support new products and services, including voice transmission
services; stabilizing or reducing the rate of price compression on certain of
our communications services; integrating strategic acquisitions including the
acquisition of Broadwing; attracting and retaining qualified management and
other personnel; and the ability to meet all of the terms and conditions of our
debt obligations. Level 3's Annual Report on Form 10-K, subsequent Quarterly
Reports on Form 10-Q, recent Current Reports on Form 8-K and other Securities
and Exchange Commission filings discuss the foregoing risks as well as other
important risk factors that could contribute to such differences or otherwise
affect our business, results of operations and financial condition. The
forward-looking statements in this document speak only as of the date they are
made. Level 3 and Broadwing do not undertake any obligation to update any
forward-looking statement to reflect circumstances or events that occur after
the date such forward-looking statement is made.
This document shall not constitute an offer of any securities for sale. The
proposed transaction will be submitted to Broadwing's stockholders for their
consideration. Level 3 and Broadwing will file a registration statement, a proxy
statement/prospectus and other relevant documents concerning the proposed
transaction with the SEC. Stockholders of Broadwing are urged to read the
registration statement and the proxy statement/prospectus and any other relevant
documents filed with the SEC when they become available, as well as any
amendments or supplements to those documents, because they will contain
important information. Stockholders of Level 3 can obtain more information about
the proposed transaction by reviewing the Form 8-K to be filed by Level 3 in
connection with the announcement of the transaction, and any other relevant
documents filed with the SEC when they become available. You will be able to
obtain a free copy of the proxy statement/prospectus, as well as other filings
containing information about Level 3 and Broadwing, at the SEC's Web site
(http://www.sec.gov). Copies of the proxy statement/prospectus and the SEC
filings that will be incorporated by reference in the proxy statement/prospectus
can be obtained, without charge, by directing a request to Level 3, Investor
Relations, 1025 Eldorado Blvd., Broomfield, CO 80021, 720-888-2500 or to
Broadwing, Investor Relations, 1122 Capital of Texas Highway South Austin, TX
78746-6426, (866) 426-7847.
Level 3, Broadwing and their respective directors and executive officers may be
deemed to be participants in the solicitation of proxies from the stockholders
of Broadwing in connection with the proposed transaction. Information about the
directors and executive officers of Level 3 is set forth in the proxy statement
on Schedule 14A, dated April 6, 2006, as supplemented, for Level 3's 2006 annual
meeting of stockholders. Information about directors and executive officers of
Broadwing and their ownership of Broadwing common stock is set forth in the
proxy statement on Schedule 14A, filed with the SEC on March 24, 2006, for
Broadwing's 2006 annual meeting of stockholders. Additional information
regarding participants in the proxy solicitation may be obtained by reading the
proxy statement/prospectus regarding the proposed transaction when it becomes
available.
***
The following is a transcript of the conference call for investors and analysts
conducted by members of Level 3 Communications, Inc. senior management on
October 17, 2006.
***
CORPORATE PARTICIPANTS
Valerie Finberg
Level 3 Communications, Inc. - VP IR
Jim Crowe
Level 3 Communications, Inc. - CEO
Buddy Miller
Level 3 Communications, Inc. - Vice Chairman
Sunit Patel
Level 3 Communications, Inc. - CFO
Kevin O'Hara
Level 3 Communications, Inc. - President, COO
CONFERENCE CALL PARTICIPANTS
Pat Dyson
Credit Suisse - Analyst
Jonathan Chaplin
JP Morgan - Analyst
Colby Synesael
Merriman - Analyst
David Janazzo
Merrill Lynch - Analyst
Dave Sharret
Lehman Brothers - Analyst
Anton Anikst
Morgan Stanley - Analyst
Anthony Klarman
Deutsche Bank - Analyst
Donna Jaegers
Janco Partners - Analyst
James Breen
Thomas Weisel Partners - Analyst
Tom Egan
JP Morgan - Analyst
Frank Louthan
Raymond James - Analyst
PRESENTATION
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Operator
Welcome to the investor conference call. (OPERATOR INSTRUCTIONS). As a reminder,
today's call is being recorded. I would now like to turn the call over to
Valerie Finberg, VP of Investor Relations. Please go ahead.
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Valerie Finberg - Level 3 Communications, Inc. - VP IR
Good morning and thank you operator. Welcome to our conference call this morning
to discuss the announcement of Level 3's agreement to acquire Broadwing
Corporation. As a quick note, on today's call we will not be discussing
guidance, current business trends or third quarter results. Please join us on
Tuesday, October 24 at 10 AM Eastern time for our third quarter earnings call
when we will address those topics.
On the call with us today we have Jim Crowe, Chief Executive Officer; Buddy
Miller, Vice Chairman; Kevin O'Hara, President and Chief Operating Officer; and
Sunit Patel, our Chief Financial Officer.
Before we get started, I would like to remind everyone that some of the
statements we will be making today are forward-looking in nature and involve
risks and uncertainties. Actual results may vary significantly from those
statements. As today's presentation will discuss a business combination
transaction, the following information is required by the SEC's rules and
regulations in the context of the business combination transaction. Please bear
with me as it is a long statement.
The following presentation shall not constitute an offer of any securities for
sale. The proposed transaction will be submitted to Broadwing's stockholders for
their consideration. Level 3 and Broadwing will file a registration statement, a
proxy statement, prospectus and other relevant documents concerning the proposed
transaction with the SEC. Stockholders of Broadwing are urged to read the
registration statement and the proxy statement/prospectus and any other relevant
documents filed with the SEC when they become available, as well as any
amendments or supplements to those documents because they will contain important
information. Stockholders of Level 3 can obtain more information about the
proposed transaction by reviewing the Form 8-K to be filed by Level 3 in
connection with the announcement of the transaction, and any other relevant
documents filed with the SEC when they become available. You will be able to
obtain a free copy of the proxy statement/prospectus, as well as other filings
containing information about Level 3 and Broadwing, at the SEC's website, which
is http://www.sec.gov. Copies of the proxy statement/ prospectus and the SEC
filings that will be incorporated by reference in the proxy statement/prospectus
can be obtained without charge by directing a request to Level 3 Investor
Relations at 1025 Eldorado Boulevard in Broomfield, Colorado, 80021, or by
calling 877-585-8266, or to Broadwing Investor Relations, 1122 Capital of Texas
Highway, South Austin, Texas, 78746, or by calling 866-426-7847.
Level 3, Broadwing and their respective directors and executive officers may be
deemed to be participants in the solicitation of proxies from the stockholders
of Broadwing in connection with the proposed transaction. Information about the
directors and executive officers of Level 3 is set forth in the proxy statement
on Schedule 14A, dated April 6, 2006, as supplemented for Level 3's 2006 annual
meeting of stockholders. Information about directors and executive officers of
Broadwing and their ownership of Broadwing common stock is set forth in the
proxy statement on Schedule 14A filed with the SEC on March 24, 2006, for
Broadwing's 2006 annual meeting of stockholders. Additional information
regarding participants in the proxy solicitation may be obtained by reading the
proxy statement/prospectus regarding the proposed transaction when it becomes
available.
With that, I will turn the call over to Jim.
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Jim Crowe - Level 3 Communications, Inc. - CEO
Good morning to everyone. As Valerie said, we're very pleased today to announce
we have signed a definitive agreement to acquire Broadwing, a leading provider
of network communications services and solutions. During our call our Vice
Chairman, Buddy Miller, will discuss the transaction structure. Our Chief
Financial Officer, Sunit Patel, will discuss the financial aspects of the deal.
He will then turn it over to Kevin O'Hara who will cover operational aspects of
the deal, and describe our current thinking about integration. I will then sum
it up and we will open it up for questions and answers.
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Buddy Miller - Level 3 Communications, Inc. - Vice Chairman
Good morning everyone. As Jim said, we announced this morning that we have
signed a definitive agreement to acquire Broadwing, a publicly held national
telecommunications provider. The transaction is subject to regulatory approvals
and the vote of Broadwing's stockholders. We expect to close the transaction in
the first quarter of 2007.
Level 3 is paying $8.18 in cash plus 1.3411 shares of Level 3 common stock for
each of Broadwing's shares outstanding on the closing date. To be clear, the
cash amount and stock conversion ratio are fixed without any collaring
mechanism.
Today, Broadwing has approximately 88 million shares outstanding, plus another
approximately 3 million shares subject to options and other rights that would be
in the money if closing were today. While the number of Broadwing shares issued
pursuant to options and other rights could vary somewhat depending upon the
price of Level 3 stock at closing, based upon today's prices Level 3 would in
aggregate be paying approximately $744 million in cash and issuing approximately
122 million Level 3 shares.
Based on yesterday's closing price of Level 3 stock of $5.32, this would imply
total consideration of $1.393 billion for all of Broadwing's outstanding shares.
Note that as of June 30, Broadwing had approximately $350 million cash on hand
and only approximately $200 million in debt, including capital leases. This
cash, adjusted for any changes between June 30 and closing, would reduce the
amount of cash Level 3 pays from its own coffers from approximately $744 million
to approximately $394 million. And the excess cash above debt of approximately
150 million would effectively reduce the total consideration paid for the
business from $1.393 billion to $1.243 billion.
Based upon the approximately 1.175 billion Level 3 shares outstanding, the
approximately 122 million Level 3 shares issued to Broadwing stockholders would
constitute approximately 9.4% of Level 3 shares outstanding after the closing.
We believe that this approach provides an appropriate mix of cash and stock for
the transaction. The transaction allows Level 3 to further leverage our existing
infrastructure and deepen both companies' relationships with our wholesale
customers and enterprise customers.
I will now turn the call over into Sunit Patel, who will discuss the financial
implications of the Broadwing acquisition.
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Sunit Patel - Level 3 Communications, Inc. - CFO
I will start first with the highlights and then provide a summary of the
financial impact of the Broadwing transaction and what it means for Level 3. We
believe this transaction creates significant value for our investors. Besides
the obvious benefits of industry consolidation, we expect that this combination
will provide sizable synergies that will take advantage of Level 3's cost
structure and metro access networks.
Second, this transaction will continue to diversify our revenue base and
increases the percent of our revenue from the enterprise segment, and further
improves our leadership position in the wholesale segment. From a balance sheet
and financial leverage perspective, the incremental cash flow contribution from
this transaction will improve our total debt to adjusted OIBDA ratio and still
leaves us with a healthy level of liquidity in relation to our cash flow needs
until cash flow breakeven.
I will now cover the financial impact of this transaction. With the acquisition
of Broadwing, Level 3 is buying a company with over $900 million of annual
revenues, growing at about 4 to 5% annually. Our assumption is that this level
of growth will continue over the next year or so and then improve over time. We
hope we can do better than that.
From a customer segment perspective the mix is about half carrier and half
enterprise. From a product mix perspective based on second quarter 2006 results,
Broadwing data, Internet and broadband services were about 56% of their business
and the voice services were approximately 44% of revenues.
Assuming a first quarter 2007 close and current plans for integration, we expect
the transaction to be additive to Level 3's stand-alone adjusted OIBDA in 2007
and additive to both adjusted OIBDA and free cash flow in 2008. This includes
all integration costs we would incur in 2007 and 2008.
The bulk of the integration should be complete within 18 months of closing.
After the integration is complete, we expect 2009 adjusted OIBDA contribution
from Broadwing to be about $300 million a year, and increasing thereafter as the
overall adjusted OIBDA margin for this business should mirror the Level 3
business.
The 2009 cash flow contribution, or adjusted OIBDA less capital expenditures, is
expected to be over $200 million. While 2008 will still be a transition year, we
expect about a $200 million to $250 million of adjusted OIBDA contribution
inclusive of integration expenses.
We expect the combination of our operations with Broadwing to yield over $200
million in annual cost synergies after integration efforts are complete. About
40% of those cost synergies are expected to come from network expense synergies
and about 60% are expected to come from operating expense synergies.
In addition, we expect to get some benefit from small improvements in customer
churn. Integration costs should be about $110 million to $130 million and will
be spreadout over 2007 and 2008. The integration is expected -- the integration
costs is expected to comprise of approximately $20 million in network expense
costs, about $20 million to $30 million in operating expense cost, approximately
$40 million to $50 million in capital expenditure cost, and about $30 million in
transaction costs, which will be ascribed to the purchase price.
From a balance sheet perspective, Level 3's cash and marketable securities as of
the second quarter of 2006 pro forma for 2008 debt we redeemed in July, the sale
of Software Spectrum, as well as the cash used in the purchase of TelCove and
Looking Glass were approximately $1.4 billion. Broadwing's cash position as of
June 30, 2006 was approximately $350 million. Therefore, the pro forma
consolidated cash position of the company for the combined company as of the end
of the second quarter, taking into account the cash portion of the
consideration, would be about $1 billion. Obviously, that does not take into
account the cash flow losses of both companies for the period of the third
quarter of 2006 until closing.
We expect that our debt to adjusted OIBDA ratio will improve by at least a full
turn in 2008. More importantly, this transaction is expected to be accretive to
both our adjusted OIBDA and free cash flow on a per-share basis from 2008
onwards. As we approach the closing of this transaction, we will be able to
provide more specific guidance on 2007.
To sum up, we view this as a great combination for all our investors. It
improves our strategic competitive and financial position. With that I will turn
the call over to Kevin.
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Kevin O'Hara - Level 3 Communications, Inc. - President, COO
Level 3's communication acquisitions and integrations have fallen into two
categories. The first category of acquisition that Level 3 has participation in
are backbone deals such as Genuity and WilTel, where most of the value is
derived by combining traffic onto a common network and eliminating a significant
amount of duplicative costs.
The second type of acquisitions that we have participated in, are more
complimentary and involved growing companies, such as Looking Glass and TelCove,
where some value is derived by eliminating duplicative costs -- but more value
is derived as a result of their continued growth and leveraging their strategic
assets. The Broadwing acquisition and integration will embody some of each.
Broadwing provides service to wholesale and enterprise customers over a domestic
backbone that spans approximately 19,000 miles. Their revenue is split roughly
50-50 between wholesale markets and enterprise markets. We anticipate migrating
all customer traffic onto one common network and realizing significant synergies
in operating and G&A costs.
In addition to the savings to be realized by eliminating duplicative backbone
costs, a significant portion of synergy is anticipated to come from the
migration of Broadwing's off-net traffic onto the Level 3 metro assets,
improving the gross margin and OIBDA profile of the existing Broadwing business.
Over the last year Broadwing has grown its revenue, experiencing particular
success with expanding its enterprise customer base and service offerings. The
integration of the enterprise salesforce and support capabilities will be driven
primarily by growth, not cost synergies.
We believe that Broadwing has earned a good reputation with their customers and
that their enterprise salesforce is a key component of that success. We intend
to leverage their customer relationships, salesforce and offerings to accelerate
the growth in our Business Markets group.
As a result of the acquisitions of TelCove, ICG, Looking Glass and Progress,
Level 3 generates approximately 10% of our revenue today from the enterprise
market. We recently consolidated all customer facing activities for the
enterprise market into the Level 3 Business Markets group and chartered them to
leverage the tremendous metro and intercity fiber assets that Level 3 owns for
the benefit of enterprise customers.
The integration of Broadwing's enterprise business will focus much more on
continued revenue growth, migration of their traffic onto Level 3's metro
facilities, and a reduction in their current churn rates.
In our second quarter call we noted we were ahead on the WilTel integration. We
continue to run ahead of plan and have now completed the majority of integration
efforts from WilTel, and we have completed these activities under budget.
We will immediately begin integration planning for Broadwing, subject to
applicable law. As a result of the integration experience we've gained over the
past few years, we believe we are well-positioned for the integration of
Broadwing.
In summary, we believe that the combination of Level 3 and Broadwing will
benefit all of our customers and national and international products and
services of Level 3 provides are complimentary to those provided by Broadwing.
The metro assets that Level 3 owns will improve the financial profile of the
Broadwing revenue base and will make the enterprise offerings more competitive
in the marketplace.
We also believe that this combination is very positive for our stockholders,
employees and customers as the transaction further delevers Level 3's balance
sheet, is adjusted OIBDA accretive in the first year, and makes our end-to-end
service offerings even more compelling. We look forward to the detailed
integration planning, and most importantly the actual integration itself.
With that I will turn the call back over to Jim.
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Jim Crowe - Level 3 Communications, Inc. - CEO
I will sum up with what you have heard from Buddy and Sunit and Kevin, maybe in
several points. First, this is a good deal for Level 3 based on cost savings and
synergies alone. Second, there is real upside to the deal if we can further
lower churn, increase revenue growth and improve margins. And we believe that
based on history, we have the capability to do that, although we have not
counted on that in our integration planning and in the deal itself.
Third, Broadwing's national marketing, sales and capabilities to sell to
enterprise customers is a valuable addition to Level 3's growing business focus.
Fourth, we think we have the integration experience to ensure that the two
companies will come together in a positive way.
And finally, we think it is clear that this transaction is financially positive.
It is cash flow accretive quite quickly. And as Sunit mentioned, it delevers our
balance sheet after integration by a full turn, a very meaningful improvement.
Put all that together and we think this is a good deal for both companies, and
we look forward to expeditiously closing the transaction.
With that, operator, would you explain the procedures for questions and answers
please.
QUESTION AND ANSWER
--------------------------------------------------------------------------------
Operator
(OPERATOR INSTRUCTIONS). Pat Dyson, Credit Suisse.
--------------------------------------------------------------------------------
Pat Dyson - Credit Suisse - Analyst
I just have I guess three questions. First on -- I don't know if you mentioned
this, but your comments around the Broadwing cash and the Broadwing debt, could
you just restate exactly what your thoughts are as far as what you plan to do
with that cash -- I'm sorry, with that debt at Broadwing?
And then secondly on -- Sunit, you talked a little bit about CapEx, and I think
you implied that it is going to be roughly around $100 million of incremental
CapEx from Broadwing in 2008. Is that the right number to be thinking about also
for '07 as well? And whether you can actually take the number down going
forward?
And then finally, just as it relates to cash and the balance sheet, what is your
thoughts on what the right cash balance is, or should be, going forward post
this transaction? Thanks.
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Jim Crowe - Level 3 Communications, Inc. - CEO
Sunit, why don't take the first two, and I will take the third.
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Sunit Patel - Level 3 Communications, Inc. - CFO
Your question on the Broadwing debt, as you know, they have $180 million of
convertible debt, $20 million of debt roughly in leases. I think with respect to
the convertible debt we will be analyzing that here between now and closing and
make a determination what we should do with that. So we don't have any plans yet
of any kind in terms of what we do. Summing it up, all kinds of options there,
but we haven't really decided yet what we're going to do.
On the CapEx, yes, I think what I indicated that for a runrate basis the CapEx
in '09 going forward would be in the $100 million range, which is the difference
between the $300 million dollar of EBITDA and the $200 million of cash flow. In
'08 it will probably be a little less than that. I think '07 will still be high,
because keep in mind we have integration costs occurring in '07 and '08, so I
think that capital expenditures should be in that zip code anyway. But as I said
in my remarks, as we get closer to the closing we will be able to provide more
specific guidance.
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Jim Crowe - Level 3 Communications, Inc. - CEO
In regard to your question about the balance sheet and cash, if you're asking
how much cash we think is appropriate for Level 3, I guess I would ask -- I
would answer the question this way. Three or four years ago when we were quite
heavily negative cash flow -- we were far from free cash flow breakeven I would
say. The amount of cash we wanted was obviously considerably higher than it is
today. What we needed on the balance sheet was considerably higher than what we
need today, given the fact that our net debt to OIBDA is improving very rapidly,
our free cash flow profile is improving rapidly. We can certainly expect that
free cash flow breakeven is not far in the future.
We also, I think, would importantly point out that as last years demonstrated, I
think that we have access to the capital markets pretty broadly should we need
to do so. But right now we have $1 billion pro forma for this transaction as we
speak, so we're feeling pretty comfortable. I don't know that there is a
specific number. It will depend on whether we're talking about today or a year
from now, but we're quite comfortable that we have the kind of liquidity that we
need.
I would say, as we have said many times in the past, we value liquidity. We
think it is an important matter in a competitive company and a competitive
industry, and we intend to remain appropriately liquid. Next question.
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Operator
Jonathan Chaplin with JP Morgan.
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Jonathan Chaplin - JP Morgan - Analyst
Congratulations. This looks like a great announcement. I had a couple of quick
questions. Forgive me if you mentioned this, I missed the very beginning of the
call, but I am wondering if we can get a better idea of the integration -- the
timing of the integration expenses, whether that is very much weighted towards
2007.
Secondly, the full turn in leverage reduction, what does that do to your ability
to refinance some of your high coupon debt today? Are there pieces of debt that
given where your leverage is going to end up as a consequence of this
transaction you can start refinancing at lower coupons today, or do you really
have to wait for the transaction to close before you can start tackling that?
Then thirdly, I'm wondering do you have a rough -- this clearly improves your
positioning in the retail end price market. I'm wondering if you have a rough
estimate of what your share of the wholesale market is and what Broadwing's is?
Then finally, if you give us an idea on what this might do in terms of improving
or feeding into an already improving industry pricing environment, that would be
really helpful. Sorry for the multiple questions.
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Jim Crowe - Level 3 Communications, Inc. - CEO
That is a list. I will try to cover point number two, while the others are
thinking about it. Kevin, if you would take the question on integration and our
retail services focus and perhaps pricing. Why don't you take that first
question on integration, when expenses are expected and how long we expect it to
take.
But let me start by saying with respect to refinancing and improving balance
sheets, I think it is pretty clear if you look at the trading in our various
securities that the market recognizes the improvements we have enjoyed over the
last year, year and a half. I think it is certainly true that today we could
potentially undertake some transactions that might improve our balance sheet.
And I think we expect that we will continue to see those opportunities to
refinance at attractive rates. With regard to the timing of any particular
transaction, we will let you know when we make decisions.
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Sunit Patel - Level 3 Communications, Inc. - CFO
On the integration expenses timing, given the uncertainties in terms of when we
would close exactly, and that would have a big impact on two things, timing of
EBITDA contribution from Broadwing, integration costs synergies. That is why we
haven't been too specific, but I think it is safe to assume if we close in the
first quarter and we say the bulk of integration will take 18 months -- we've
said how much the integration costs will be. I would say that at least half of
those expenses would occur in '07 and the remaining in '08, but it is tough to
be too precise at this point until we get closer to the closing of the
transaction.
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Jim Crowe - Level 3 Communications, Inc. - CEO
Kevin, you want to take the question about market share, wholesale, retail,
pricing.
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Kevin O'Hara - Level 3 Communications, Inc. - President, COO
There is not a great measure for how -- precisely what the wholesale market is.
People use different definitions. I guess the way we're viewing this particular
transaction is that Level 3 we think had a very strong position in the wholesale
marketplace. In those areas where we chose to compete we have said about half of
the Broadwing business, or again roughly $450 million, is enterprise.
In the overall scheme of the communications marketplace that 450 isn't going to
move the needle dramatically. What we do believe is the result of combining
these two companies together further strengthens our position. We like the
position of the combined company after the fact. Specific market share numbers
are a bit hard to come by, and I wouldn't want to speculate.
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Jim Crowe - Level 3 Communications, Inc. - CEO
In terms of pricing.
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Kevin O'Hara - Level 3 Communications, Inc. - President, COO
In terms of pricing, I think we have seen a stabilizing pricing environment
over the course of the last 12 months or so, consistent with what we have been
saying on the earnings call. We haven't seen any reason to think that that
environment is going to turn around. And we believe that that market
environment, a more stable pricing environment is likely for all kinds of
reasons. So we are still comfortable with the market environment for pricing
looking ahead as well as past.
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Jim Crowe - Level 3 Communications, Inc. - CEO
I think we have, at least I have said, if nothing changed in relationships
between supply and pricing in the market, today's supply/demand pricing, we
would be comfortable, and there are some indications that pricing could improve.
Industry consolidation is certainly one of the factors that goes into that view
of the future. Next question.
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Operator
Colby Synesael with Merriman.
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Colby Synesael - Merriman - Analyst
A quick questions. Obviously one of the biggest concerns for Broadwing in the
past going after the enterprise business had been their reliance on third-party
providers for that last mile, or I guess, special access. Do you have an idea
what percentage of those customers today you guys will be able to take off this
-- from off-net or special access and put on the new Level 3 metro services?
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Kevin O'Hara - Level 3 Communications, Inc. - President, COO
Without getting specific about which customers, I think if you look at the
gross margin of Broadwing, according to their most recent filings if you look at
what Level 3 has guided to for gross margin as we integrate our more recent
metro acquisitions, we believe that over time that Broadwing customer base would
migrate towards those Level 3 gross margins. And Sunit, we said that we would
expect our gross margin and aggregate to be 60, 65% after the integration of the
metro companies?
--------------------------------------------------------------------------------
Sunit Patel - Level 3 Communications, Inc. - CFO
Yes.
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Kevin O'Hara - Level 3 Communications, Inc. - President, COO
That is roughly -- very roughly double the Broadwing gross margin levels of the
second quarter, so we think that there is a tremendous opportunity. Which
specific customers is hard to tell, but certainly from an overall financial
perspective a tremendous opportunity.
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Sunit Patel - Level 3 Communications, Inc. - CFO
Another way to get it, as I said, we expect to reduce costs by about $200
million a year, which 40% will come from network expense reduction. So that
should give you an idea looking at their P&L how much improvement we can make
there over the next couple of years.
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Colby Synesael - Merriman - Analyst
My other question, is there any management that you already know of from
Broadwing that is going to become a little over to Level 3?
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Jim Crowe - Level 3 Communications, Inc. - CEO
I think it is fair to say, as we always do in these acquisitions, that we're
going to sit down with the Broadwing management. They're an excellent group of
people led by Steve Courter, their CEO. We will sit down and we will try to make
sure we have picked the best person from either team to run each activity. That
is what we have done in the past, and we expect to do that in the future.
I would add too to the first question concerning usage of our metro assets. It
isn't a random process that results in those gross margin improvements. Once we
combine the companies we of course make certain that we make every effort to
sell in areas where we have the advantage of our own assets and our own
facilities. That is how you get those margins, by making certain that you focus
on customers that you have facilities directly to. So we would expect to take
advantage of that in the future. Next question.
--------------------------------------------------------------------------------
Operator
David Janazzo, Merrill Lynch.
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David Janazzo - Merrill Lynch - Analyst
Can you describe for us when you look at the Broadwing assets versus the Level
3 assets, can you describe how you think about what pieces are complementary and
what pieces are duplicative?
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Jim Crowe - Level 3 Communications, Inc. - CEO
When you use the term assets, do you mean network?
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David Janazzo - Merrill Lynch - Analyst
Primarily network, yes.
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Kevin O'Hara - Level 3 Communications, Inc. - President, COO
This is Kevin. There are a couple of places where Broadwing may have unique
footprint. They may have some additional density in certain parts of the
country. Those we will look at certainly from a complementary standpoint.
Where the networks are combining, or excuse me, connecting two common city
pairs, it is much more of an economic analysis which one is going to be less
costly to run over time. And in the past we've done route by route comparisons
to figure out where do we get complementary network, where is it just
duplicative cost. We expect to go through that analysis as part of the
integration planning process. The final answer to be determined during that
process.
We would certainly expect that a good number of the route miles, 19,000, would
be eliminated in aggregate. Whether that comes from the Level 3 network or the
Broadwing network is less relevant than the fact that a good number of the
network miles will be coming out because they are connecting redundant city
pairs.
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Operator
Dave Sharret, Lehman Brothers.
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Dave Sharret - Lehman Brothers - Analyst
I guess first, it is pretty clear in terms of cost energy opportunities, I was
just wondering if you could touch back on the revenue opportunities. It just
looked like revenue growth at Broadwing year-over-year was closer to like 1%. I
think there was a mention of about 4%, but lower than the organic growth rate if
you're looking for -- just talking about the opportunities you have to
accelerate that growth maybe on the wholesale and the enterprise side.
Then secondly, just in terms of your appetite for more M&A at this point, given
what you have recently closed -- in the process of integrating and then this
this early next year, do you think that takes you out of the M&A market for a
little bit now, or are there still things that you could handle with this at the
same time?
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Jim Crowe - Level 3 Communications, Inc. - CEO
With respect to your first question -- maybe you would be the best to answer
second. Kevin?
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Kevin O'Hara - Level 3 Communications, Inc. - President, COO
The revenue growth, as you know, is really comprised of a few things -- new
sales as well as was happening to the base as a result of either pricing
changes, churn, whatever. We believe that there are opportunities to go to work
on churn a little bit -- within Broadwing would certainly help topline growth.
It is a much easier way frankly to sustain or accelerate topline growth.
As for sales, Level 3 organically, as we have said in core services, we're
growing at about 20% on an annualized basis this year. The metro acquisitions
that we made are all prior to closing, we are growing in the teens to 20% range.
We would view all of our businesses as having similar targets over time.
There are specific actions that we have taken inside Level 3 to generate 20%
organic growth in core. There are specific actions that the Business Markets
group has taken that generate the kind of organic growth that they have been
experiencing. We would expect that we are going to converge on similar growth
rates over time. But it really -- I guess, the details of that and how we get
there will come out through the integration planning process in this area more
specifically after closing.
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Dave Sharret - Lehman Brothers - Analyst
Do you --?
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Jim Crowe - Level 3 Communications, Inc. - CEO
Go ahead please.
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Dave Sharret - Lehman Brothers - Analyst
I was just going to follow up. Kevin, do you view all revenues here as core
within Broadwing?
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Kevin O'Hara - Level 3 Communications, Inc. - President, COO
There is a small piece that is not core. I don't have that break out right
here, but clearly the --.
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Jim Crowe - Level 3 Communications, Inc. - CEO
The residential, for instance, we would (multiple speakers) small piece of
residential.
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Kevin O'Hara - Level 3 Communications, Inc. - President, COO
There is some residential. There might be some reciprocal comp, but it is v
things. (multiple speakers).
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Sunit Patel - Level 3 Communications, Inc. - CFO
The majority would be core revenue. Always on the voice side that revenue has
been declining some. But again, the way we look at it, I think the majority of
that revenue would be core revenue -- the vast majority.
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Jim Crowe - Level 3 Communications, Inc. - CEO
There are some basics that we believe are essential to improving sales rates.
For instance process simplification is a real focus here. We have really spent a
lot of time and effort making sure that we have a straightforward set of
products. We often find eliminating certain products is a good way to improve
growth rate. Simplifying the processes from sales, provisioning to billing and
customer care, which is hard work. It is not fun. It takes a great deal of
effort by a large number of people. But even a day or two reduction in the
end-to-end time from sales to billing is a major improvement in your ability to
sell. There aren't any silver bullets. It is all hard work, but it is hard work
that we are engaged in and believe we have experience at, and certainly are
focused on.
Your second question was -- remind us here.
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Dave Sharret - Lehman Brothers - Analyst
The appetite for more M&A.
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Jim Crowe - Level 3 Communications, Inc. - CEO
I was hoping to forget that one. The appetite for more M&A. I would put it this
way. Whenever we are fully engaged, and I would say we're pretty close at this
point to being fully engaged, the hurdle or the bar goes way, way up.
Obviously, if you found some deal that was simply irresistible, by definition
you would have to at least look at it. But I would say right now the bar is
pretty high. In fact, I would say it is very high. We're going to work hard to
do what we have already taken on, particularly making sure that hard in the
trenches work I described earlier -- a common set of services, a common network
inventory, a common process, a common set of products that everyone understands
across the Company -- we get that hard work done.
I would say while we are engaged in that our appetite is pretty low and our
hurdle would be pretty high. Buddy, you've got any -- Buddy Miller runs this end
of our business, and may have a comment.
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Buddy Miller - Level 3 Communications, Inc. - Vice Chairman
Our people are always working and looking for those opportunities, but as Jim
says, the hurdle will be very high now. It is always possible we will run into
kinds of acquisitions that would draw on different resources, different parts of
the Company than those that are already involved in the Broadwing, WilTel and
the TelCove and other acquisitions. And the bar would be a little bit lower for
those. But in general, we try to be very careful to make sure that if we take it
on we can integrate it well. And as Jim said, that pushes the bar up now.
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Jim Crowe - Level 3 Communications, Inc. - CEO
I'm going to add one more comment, because I do know this is an important
matter to many of our investors. I would say that we enter into any discussion
about acquisitions fully aware that more than half of all acquisitions destroy
value for the acquiring company's shareholders -- more than half. That is
because, at least in our view, people -- either the companies either overpay or
don't plan the integration properly, or both.
We, I think through the last three or four years demonstrated a healthy concern
about any acquisition. And we have worked very hard not to ever forget that not
only is it important to buy at a fair price, it is important to have all of the
questions as well as you can about integration answered before you sign. Now
you're going to make mistakes, but you have to do the planning. And I would
assure all of our investors that we're not going to forget that, and we're going
to continue to have a very, very high hurdle before we acquire any company. Next
question.
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Operator
Anton Anikst, Morgan Stanley.
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Anton Anikst - Morgan Stanley - Analyst
Congrats on the deal. I was hoping to drill down on the bridge from what I
would describe as your breakeven positive stand-alone EBITDA for Broadwing to
kind of an implied $300 million or so a couple of years down the road.
I think, Kevin, you alluded to this earlier. We will look at the gross margin
difference versus Level 3 today -- it is, call it 1,500 basis points, and Level
3 a year ago before WilTel dilution it is a full 3,000 basis points or so lower.
I'm curious if you guys have a view as to how much of that gross margin
difference is a function of the revenue mix, voice versus data obviously being
-- voice being a higher component for Broadwing than it is for Level 3 today?
Then I guess by extension help us think about network expense savings versus
SG&A savings. Perhaps if you could give us updated headcount figures for both,
pro forma Level 3 and Broadwing, that would be helpful.
If I may just tack one on. If I understood your answer to Pat's question
correctly, you are saying you'll not be tapping the Capital Markets to fund a
portion of this transaction irrespective of whether or not the change of control
put is exercised by the Broadwing convert holders.
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Jim Crowe - Level 3 Communications, Inc. - CEO
On the last one what we said is we will be looking at it and doing what we
think is in the best interest of our securities holders. We have a number of
different options. We haven't said yes, we haven't said no. It wouldn't be
appropriate at this point to do so.
With respect to your first question, that is if I understood it, what are the
sources of the cost savings. Sunit said earlier about 40% are network expense.
The balance are from other sources, primarily SG&A.
I'm going to take the network expense part, and then turn it over to Sunit, and
then Kevin may have a comment. With respect to network expense recognize that
Level 3's reduction in gross margins this past year come from the addition -- at
the beginning of the WilTel -- at closing of WilTel of approximately of $1
billion of SBC long-distance that had low margins. That is effectively going to
go away next year or be reduced to a very small amount. And we expect our gross
margins to jump right back up to the kind of numbers you have seen before.
We also believe -- and that is the 3,000 basis points gap that you talked about
earlier versus Broadwing. Those gross margins come, and we expect to continue to
have them come, from our previous and continuing focus on extending our network
closer and closer to the places at which we pick up traffic from customers and
handoff traffic to customers. For us that includes voice.
We work hard on things like direct to end office termination, using the roughly
2 million trunks that we have in place that were put in place because of our
dial access platform, and many, many other assets to continue to work on gross
margin. And we expect to bring that benefit to Broadwing, who as I'm sure you
know, don't have that kind of rich metro set of facilities. Sunit, do you want
to talk about the SG&A?
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Anton Anikst - Morgan Stanley - Analyst
Yes, if I may. If I'm hearing you correctly, it sounds like the opportunities
are more on the legacy IXC side as opposed to legacy Focal side.
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Jim Crowe - Level 3 Communications, Inc. - CEO
I would say it is both. legacy Focal -- now we will have more data, more
information for you. And what I am about to say take as a preliminary, but as I
remember, Focal was switch heavy local network [company]. That is they were at
one point or another they were a so-called smart bill CLEC where they buy
switches and then use resold local facilities. And they have a fair amount of
voice services. It doesn't mean they didn't have any local facilities, but I
don't think they have the kind of footprint in any one area that Level 3 has.
And there's a fair amount of local voice and data services.
We think we bring a big benefit. We also think we bring a big benefit to the IXC
business by lowering access expense. We think we bring a big benefit to the
wholesale side by offering an end-to-end service as opposed to having to resell
private lines or lease circuits. Add all of that together and we think it is not
limited to one set of products.
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Sunit Patel - Level 3 Communications, Inc. - CFO
Another way to think about what Jim is saying, with $900 million of revenue, as
I said, we are assuming 4 to 5% growth. You look out to 2009, which is where I
talked about the guidance specifically -- for us to in three years out be close
to $1 billion of revenue -- for us to squeeze 30% of the EBITDA line -- I think
we have also levers, as Jim pointed out, including churn improvement that Kevin
pointed out. So when you put it altogether, for us to do 30% EBITDA margin on $1
billion of revenue with the facilities base we have and the metro facilities we
have we think is definitely reasonable.
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Kevin O'Hara - Level 3 Communications, Inc. - President, COO
Just to reiterate a point that Jim made in response to a question awhile back,
gross margin doesn't happen by accident. It comes about by being very
disciplined about what you sell, who you sell it to, and where you sell it. It
is the combination of those three things that historically led Level 3 to report
excellent gross margins. It is the result of those three things that has our
gross margin after WilTel improving again. It is a combination of those three
things that give us confidence in our ability to see pretty market improvement
as we integrate and move forward with the Broadwing business.
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Jim Crowe - Level 3 Communications, Inc. - CEO
Thank you. That was an important question and we appreciate the chance to ampli
--------------------------------------------------------------------------------
Operator
Anthony Klarman, Deutsche Bank.
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Anthony Klarman - Deutsche Bank - Analyst
If I look at the midpoint of expectations for Broadwing's EBITDA for '08 it was
about $90 million. I guess where the Street consensus was. If I look at the
delta between that and your midpoint of call it $225 million, there was about
$130 million difference. Is that all the kind of immediate payback on the 110 to
130 of integration costs of synergies that you're getting back in '08, or is
there some benefit that you're expecting from the Broadwing assets being
combined with Level 3 that they would not have been able to achieve
independently?
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Jim Crowe - Level 3 Communications, Inc. - CEO
Are you talking now about -- when you save some benefit, are you talking about
topline improvement?
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Anthony Klarman - Deutsche Bank - Analyst
Yes, I think --.
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Jim Crowe - Level 3 Communications, Inc. - CEO
No. I think we're not forecasting any marked improvement in their rate of
growth. Although I think as I said in my remarks, as we've said in other
acquisitions, we believe there is a real upside in reducing churn and increasing
rates of revenue growth to the kind of rates of revenue growth that Level 3
enjoys. But that is not an assumption we're making in terms of the numbers that
you just described. They come from cost savings.
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Sunit Patel - Level 3 Communications, Inc. - CFO
In answer to your specific question, there are two things happening in '08. You
have in the guidance we provided there is both the benefit coming from those
integration costs and there's also some level of integration costs in 2008. And
that is all reflected in the guidance we provided.
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Anthony Klarman - Deutsche Bank - Analyst
One follow-up. If you look at the sum total of all the acquisitions that have
been made going back 18 months, as you put all these different assets together,
not just with the Level 3 assets, are there opportunities for you to peel off
pieces of these assets and monetize them -- that maybe no longer fit given the
add-on acquisitions that you made over the course of the last year that could be
monetized to raise additional capital for the Company?
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Jim Crowe - Level 3 Communications, Inc. - CEO
Not anything that is substantial - we just sold Software Spectrum, for
instance. I don't think you should assume that there are any substantial
opportunities. That doesn't say there aren't minor nonmaterial assets that could
be monetized, but no is the answer to your question, nothing material that we
know of.
--------------------------------------------------------------------------------
Operator
Donna Jaegers with Janco Partners.
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Donna Jaegers - Janco Partners - Analyst
Just two quick short ones. Is there any breakup fee? I don't know if you want
to talk bout this, but were there other bidders involved in this acquisition?
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Jim Crowe - Level 3 Communications, Inc. - CEO
2.5% breakup. And you're right about the second. Next question.
--------------------------------------------------------------------------------
Operator
James Breen, Thomas Weisel Partners.
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James Breen - Thomas Weisel Partners - Analyst
Just a couple of quick questions. One, from a regulatory standpoint, given the
delay in the AT&T/BellSouth deal, do you see any push back there from the FCC?
Then secondly, with respect to the salesforces on the retail side and the
enterprise side, what kind of overlap is there between some of the assets that
you bought in the springtime and the Broadwing assets in terms of regions or
sales offices? Thanks.
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Jim Crowe - Level 3 Communications, Inc. - CEO
With respect to the regulatory process, we have no reason to expect any unusual
treatment. Obviously this is a much smaller deal than the one you referred to.
We don't try to schedule or predict the regulatory process. I would simply say
that for the last several acquisitions we have actually moved more quickly than
we had scheduled. We would hope that would be the case here, but certainly I
can't make any assurances. Kevin?
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Kevin O'Hara - Level 3 Communications, Inc. - President, COO
Sure. As to the salesforces, that is an area of particular sensitivity prior to
an acquisition. The specific details of what they have where and who they're
selling to are -- we have a very high-level of understanding of -- when we think
of overlap of salesforces, we think that anybody that is selling and making
quota, you would like that kind of overlap because you find a way to put good
people to work better. So we're not to worry about any potential overlap in
terms of geography.
If you look at the size of Level 3 pro forma, this transaction, particularly in
the enterprise, is very small. In the overall communications marketplace we
think we have room for as many good people, good salespeople as want to come to
work.
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Jim Crowe - Level 3 Communications, Inc. - CEO
I think we have time for a couple of more questions, operator.
--------------------------------------------------------------------------------
Operator
Tom Egan with JP Morgan.
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Tom Egan - JP Morgan - Analyst
I wonder if you could just tell us in 2008 how much EBITDA -- incremental
EBITDA you would have if you didn't include the incremental cost of integration.
Or may be put another way, if you could give us a break out of the cost of
integration that you have assumed for '07 and '08 separately?
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Sunit Patel - Level 3 Communications, Inc. - CFO
I think the range required was 200 to 250. That does include some level of
integration costs. As I said earlier, it is tough to be too precise because a
lot depends on timing of when we close. You know that we gave a range of $110
million and to $130 million of integration costs. And as I said earlier, we
might end up incurring more than half of those in '07, so you can get to what
level of cost we might be in '08. Let's say are 50 million or so. That would
give you an idea of the runrate EBITDA.
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Jim Crowe - Level 3 Communications, Inc. - CEO
Next question and last question, I would say, operator.
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Operator
Frank Louthan, Raymond James.
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Frank Louthan - Raymond James - Analyst
Just quickly, looking at this from the math I am doing, it looks like it is
effectively doubling your enterprise business. And I know you moved into that
somewhat with some of the CLEC assets you bought. I am just curious, where can
we expect that to go over time as far as your enterprise? And maybe in part in
that answer, where does enterprise -- moving more to the enterprise space -- fit
into your list of priorities behind integration?
Then i'm curious from the synergies from Broadwing, what percentage are coming
from putting Broadwing traffic on your long-haul network versus putting them on
some of the local assets that you have that Broadwing has been lacking?
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Jim Crowe - Level 3 Communications, Inc. - CEO
I think with respect to your first question, I think we wouldn't argue with the
broad notion that this comes close to doubling our enterprise revenue. With
respect to the importance of enterprise, I think when we had the conference call
announcing the acquisition of TelCove, we said at that time and I would repeat,
that we think given consolidation in the industry, given the enterprise's
legitimate desire for alternatives that it is an important major market for
Level 3. It is not a side issue. It is a core matter for us.
We have set up what Kevin mentioned earlier, our Business Markets group. It is a
major effort for us. It is an area we expect to focus on in terms of management
attention and capital, because we think the key to success in business markets
is to have facilities in the Metro that allow you to have a cost structure that
is more than competitive with others offering.
That means generally speaking facilities to the customer locations, or at least
a substantial portion of the facilities you need to meet the needs of a
particular customer. So it is the core strategic matter for us.
Integration, I would view, if you want to think about it, as the means to the
end. Integration we have to do in order to get to where I just mentioned, that
is the strategic focus on enterprise. And we're happy to make the announcement
today because we think Broadwing has done a good job of building an enterprise
capability, and we look forward to working with them to integrate it in.
With that I will thank all of you who took time out to listen to us today.
Obviously, we will be reporting additional information and progress in the
coming weeks. Thank you very much. Operator, that is the end of the call.
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Operator
Ladies and gentlemen, today's call will be available for replay beginning at
7:30 AM Mountain time tomorrow, the 18th, and running through the 20th at
midnight. You may access the playback by dialing 320-365-3844 and entering the
access code, 845296. Again to access the replay dial 320-365-3844 and enter the
access code 845296. That does conclude our conference for today. Thank you for
your participation. You may now disconnect.
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to, (i) statements about the benefits of
the acquisition of Broadwing by Level 3, including financial and operating
results and synergy benefits that may be realized from the acquisition; Level
3's and Broadwing's plans, objectives, expectations and intentions and other
statements contained in this presentation that are not historical facts; and
(ii) other statements identified by words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" or words of similar
meaning. These forward-looking statements are based upon management's current
beliefs or expectations and are inherently subject to significant business,
economic and competitive uncertainties and contingencies and third-party
approvals, many of which are beyond our control. The following factors, among
others, could cause actual results to differ materially from those described in
the forward-looking statements: (1) whether the stockholders of Broadwing
approve the proposed transaction; (2) the satisfaction of the other conditions
specified in the merger agreement, including without limitation the receipt of
required governmental approvals of the proposed transaction; (3) the ability to
successfully combine the businesses of Level 3 and Broadwing; (4) the
realization of revenue and cost synergy benefits from the proposed transaction;
and (5) operating costs, customer loss and business disruption following the
merger, including adverse effects on relationships with employees. Other
important factors that may affect Level 3's and the combined business' results
of operations and financial condition include, but are not limited to:
increasing the volume of traffic on Level 3's network; developing new products
and services that meet customer demands and generate acceptable margins;
successfully completing commercial testing of new technology and information
systems to support new products and services, including voice transmission
services; stabilizing or reducing the rate of price compression on certain of
our communications services; integrating strategic acquisitions including the
acquisition of Broadwing; attracting and retaining qualified management and
other personnel; and the ability to meet all of the terms and conditions of our
debt obligations. Level 3's Annual Report on Form 10-K, subsequent Quarterly
Reports on Form 10-Q, recent Current Reports on Form 8-K and other Securities
and Exchange Commission filings discuss the foregoing risks as well as other
important risk factors that could contribute to such differences or otherwise
affect our business, results of operations and financial condition. The
forward-looking statements in this document speak only as of the date they are
made. Level 3 and Broadwing do not undertake any obligation to update any
forward-looking statement to reflect circumstances or events that occur after
the date such forward-looking statement is made.
This document shall not constitute an offer of any securities for sale. The
proposed transaction will be submitted to Broadwing's stockholders for their
consideration. Level 3 and Broadwing will file a registration statement, a proxy
statement/prospectus and other relevant documents concerning the proposed
transaction with the SEC. Stockholders of Broadwing are urged to read the
registration statement and the proxy statement/prospectus and any other relevant
documents filed with the SEC when they become available, as well as any
amendments or supplements to those documents, because they will contain
important information. Stockholders of Level 3 can obtain more information about
the proposed transaction by reviewing the Form 8-K to be filed by Level 3 in
connection with the announcement of the transaction, and any other relevant
documents filed with the SEC when they become available. You will be able to
obtain a free copy of the proxy statement/prospectus, as well as other filings
containing information about Level 3 and Broadwing, at the SEC's Web site
(http://www.sec.gov). Copies of the proxy statement/prospectus and the SEC
filings that will be incorporated by reference in the proxy statement/prospectus
can be obtained, without charge, by directing a request to Level 3, Investor
Relations, 1025 Eldorado Blvd., Broomfield, CO 80021, 720-888-2500 or to
Broadwing, Investor Relations, 1122 Capital of Texas Highway South Austin, TX
78746-6426, (866) 426-7847.
Level 3, Broadwing and their respective directors and executive officers may be
deemed to be participants in the solicitation of proxies from the stockholders
of Broadwing in connection with the proposed transaction. Information about the
directors and executive officers of Level 3 is set forth in the proxy statement
on Schedule 14A, dated April 6, 2006, as supplemented, for Level 3's 2006 annual
meeting of stockholders. Information about directors and executive officers of
Broadwing and their ownership of Broadwing common stock is set forth in the
proxy statement on Schedule 14A, filed with the SEC on March 24, 2006, for
Broadwing's 2006 annual meeting of stockholders. Additional information
regarding participants in the proxy solicitation may be obtained by reading the
proxy statement/prospectus regarding the proposed transaction when it becomes
available.