Internet content delivery company Level 3 Communications Inc is to buy smaller rival Global Crossing Ltd for about $1.9 billion in stock to strengthen its fiber-optics networks business and expand into Europe and Latin America.

The deal, which will generate savings of about $340 million a year for Level 3, brings together two companies that spent heavily on developing their networks during the dot-com boom, but which have failed to make profits for a long time.

The company expects the deal to potentially save about $2.5 billion over a few years.

Level 3's fiber-optic network is currently in the United States and Europe, while Global Crossing owns a network that spans the globe.

Global Crossing has an extensive network -- local as well as distance -- in Latin America. We don't. They have an extensive metro and long-haul presence in the United Kingdom. We don't, Level 3 Chief Executive James Crowe told Reuters.

Level 3 said the savings would come from eliminating duplicate networks and from capital spending, noting most of the savings would be in North America and Europe.

The rationale is basically to absorb a lot of fiber, said Benny Lorenzo, CEO of research firm Kaufman Brothers.

They are helping to consolidate a market that has been fragmented from a pricing point of view. This is good for the industry.

The fiber infrastructure market is dominated by AT&T and Verizon Communications Inc .

Oppenheimer analyst Timothy Horan said more pricing clout would help boost Level 3's annual revenue by more than $100 million.

He predicted more consolidation in the sector and sees XO Holdings and Cogent Communications as possible targets.

I think this is more (about) synergies overseas, where both companies have spent a lot of money building their network and have extra capacity. Pulling the companies together makes a lot of sense, said Robert Wasserman, analyst at Dawson James Securities.

Global Crossing, which emerged from bankruptcy in 2003 after going bust when the tech bubble burst in 2000, had invested in telecom carriers and online businesses to build networks -- a similar path to Level 3, which weathered the turmoil with help from an investment by Warren Buffett.

Global Crossing is now 63 percent-owned by Singapore state investment arm Temasek Holdings and Fidelity Management, a private equity firm.

Our margins have been improving since 2005 and I believe the same is true for Global Crossing, CEO Crowe said.

Level 3 is better known for providing the network backbone for streaming Netflix Inc's video-on-demand service, a market where it competes with Akamai Technologies Inc and Limelight Networks Inc .

Its content delivery business, however, accounts for only about 2 percent of its core network services revenue.


Global Crossing shareholders will receive 16 Level 3 shares for each share held, valuing Global Crossing at $23.04 a share -- a premium of 56 percent to its Friday close on Nasdaq.

Analysts said the deal offered a fair price for Global Crossing's international assets and was not expensive for Level 3, given the strategic value.

Level 3, which will also assume $1.1 billion of Global Crossing's debt, said integration costs would be $200-$225 million. It expects the deal to add to free cash flow in 2013.

Bank of America Merrill Lynch, Citi and Morgan Stanley advised Level 3 on the deal.

Shares of Global Crossing soared 79 percent to a 4-year high of $26.50, making it the second-biggest gainer on Nasdaq. About 14 million shares changed hands by 1510 ET -- more than 70 times their normal volume.

Shares of Broomfield, Colorado-based Level 3 jumped 28 percent, or 40 cents, to a near 2- year high of $1.84, with more than 355 million shares traded -- 25 times their normal volume.

(Reporting by Sayantani Ghosh and Supantha Mukherjee in Bangalore; Editing by Gopakumar Warrier and Unnikrishnan Nair)