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Level 3 to buy TW Telecom for $5.6 billion

Level 3 Communications agreed to pay roughly $5.6 billion in a cash-and-stock offer to acquire telecommunications provider TW Telecom, a deal the companies say will boost future earnings and better position the combined company in a sector that is rapidly consolidating.

Under the terms of the deal, Level 3 (LVLT) said it would acquire TW Telecom (TWTC) in a stock-and-cash transaction valued at $40.86 per share based on market close on Friday. That offer is a 12% premium to TW Telecom’s closing price on Friday, when trading volume in the company’s shares notably spiked. Level 3 said the transaction is valued at roughly $7.3 billion, including the assumption of debt.

“We believe this is a financially compelling and very strategic acquisition for Level 3 that will enhance our ability to continue to gain market share,” said Jeff Storey, president and chief executive of Level 3.

The deal, which is expected to close in the fourth quarter, is projected to add to earnings on a free cash flow basis after the first year following the transaction close. A purported benefit for the deal would be the combination of Level 3’s owned network and data centers in more than 60 countries with TW Telecom’s deep metropolitan footprint.

The Level 3-TW Telecom merger comes as the telecommunications sector has seen some large deals meant to consolidate the sector. For example, AT&T (T) last month agreed to pay $49 billion to buy DirecTV (DTV), while many news organizations are reporting Sprint (S) is close to announcing an acquisition of peer T-Mobile (TMUS).

TW Telecom is a provider of managed network services, specializing in business Ethernet, data networking, Internet access and network security services to businesses. The company serves 75 U.S. metropolitan markets with local fiber networks. TW Telecom, previously known as Time Warner Communications, was founded in 1993 as a join venture between U.S. West and Time Warner. It formed its own entity in 1998 and a year later, launched as a public company.

The company, which changed its name to TW Telecom in 2008, reported $1.56 billion in revenue for 2013. More than half of that came from data and Internet services, with the rest mostly from voice and network services. Level 3’s revenue totaled $6.31 billion last year.