Level 3 Communications continued its expansion plans, buying Southeastern-based wholesaler Progress Telecom for $137 million, equally divided between cash and company stock.

Progress Telecom operates a fiber optic backbone primarily in the Southeastern U.S., including 29 metropolitan networks, and was originally launched by Progress Energy, which remains an owner and the largest customer. The company also operates wireless towers and last fall announced a new wireless backhaul wholesale business that is being excluded from this transaction.

According to Level 3, the acquisition will lower its access costs in the Southeast and enable the combined company to realize greater efficiencies and therefore higher earnings on Progress Telecom’s revenue.

“We believe that in addition to lowering our access costs in that region, the companies' similar service offerings and customer bases, and complementary infrastructure represent unique cross selling opportunities,” said Kevin O'Hara, Level 3 president and COO, in a prepared statement. “While we expect to retain a significant local presence in the region, we believe we will be able to realize significant cost synergies by integrating certain operational and corporate activities. We expect to begin most network related integration efforts in 2007, once we have realized additional scale and efficiency through the integration of WilTel.”

Level 3 acquired WilTel in 2005 for $386 million. That deal closed in December.

“Progress Telecom currently generates annualized revenue of approximately $70 million and approximately $7 million of annualized positive free cash flow,” said Sunit S. Patel, chief financial officer Level 3 Communications, in the company’s press announcement. “We expect to begin to realize most of the cost synergy benefits during 2007 and as a result, we expect annualized cash flow to improve to approximately $30 to $35 million once we have completed the integration," added Patel. "We expect a cash-on-cash breakeven for this transaction of approximately three years, excluding potential revenue synergies.”