By Liana B. Baker and Aishwarya Venugopal
(Reuters) - Windstream Holdings Inc said on Monday it would buy fellow U.S. telecommunications company EarthLink Holdings Corp in a deal valued at about $1.1 billion, including debt, in a bid to cut costs and better compete with rivals.
The merger, if completed, would come after larger peer CenturyLink Inc agreed to buy Level 3 Communications Inc in a deal announced a week ago that was valued at about $24 billion. The competitive enterprise communications space has been consolidating rapidly this year.
Both Little Rock, Arkansas-based Windstream, which provides telephone and Internet services to consumers in rural markets, and Atlanta-based EarthLink, which was an Internet pioneer in dial-up service in the 1990s, have seen revenue fall for the past three years.
The deal is expected to generate over $125 million in cost savings within three years.
"The combination with EarthLink further advances Windstream's strategy by creating a stronger, more competitive business to serve our customers while increasing free cash flow and reducing leverage," said Tony Thomas, Windstream's chief executive.
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The deal values EarthLink at about $645.2 million, or $5.92 per share, based on Windstream's Friday closing price, according to Reuters' calculations. EarthLink had about $436 million of debt, while Windstream had $4.8 billion in long-term debt as of Sept. 30.
"The transaction is beneficial to Windstream's credit profile, as the transaction reduces Windstream's leverage modestly," Fitch analysts said in a research note.
EarthLink shareholders will receive 0.818 Windstream shares for each share they own. Windstream's offer price is at a 9.2 percent premium to EarthLink's Thursday close, before Reuters reported exclusively that the companies were in talks to merge.
Windstream shares ended roughly flat at $7.23 per share and EarthLink shares ended 10 percent lower Monday at $5.60.
EarthLink has two parts to its business: a declining dial-up Internet service for consumers, and an Internet and data provider to small- and medium-sized businesses. The dial-up business launched in 1994 and was one of the first mainstream Internet providers, along with AOL and CompuServe.
Windstream shareholders will own about 51 percent of the combined company when the deal closes, while EarthLink shareholders will own about 49 percent.
J.P. Morgan was Windstream's financial adviser, while Barclays wrote a fairness opinion for Windstream's board. Boutique advisory firm Foros was lead adviser to EarthLink, along with Goldman Sachs.
Windstream's legal adviser was Skadden, Arps, Slate, Meagher & Flom LLP, while Paul, Weiss, Rifkind, Wharton & Garrison LLP and Troutman Sanders LLP advised EarthLink.
(Reporting by Liana B. Baker in San Francisco and Aishwarya Venugopal in Bengaluru; Editing by Sai Sachin Ravikumar and Alan Crosby)