CenturyLink to Buy Level 3 for $34 Billion in Cash, Stock

CenturyLink Inc. announced on Monday that it will purchase Level 3 Communications Inc. for around $34 billion in cash and stock. Both telecommunication companies have enormous networks acquired through a number of deals over recent years, and this acquisition will significantly increase competition for AT&T Inc. in the market to route web traffic for businesses. The acquisition, which includes assumed debt, values Level 3 at $66.50 per share, around 42 percent higher than last week, before reports of the CenturyLink acquisition surfaced.

Level 3

Level 3, based in Broomfield, Colorado, is one of the largest telecommunications providers routing traffic across the web, a service that is in heavy demand from large industry players such as Netflix Inc. and Google. Level 3’s operations – operating high-bandwith internet connections for a variety of businesses – will augment CenturyLink’s existing offerings. CenturyLink, which is based in Monroe, Louisiana, will also gain access to around $10 billion in tax credits currently on Level 3’s books, said Jennifer Fritzsche, a Wells Fargo Securities LLC analyst.

Glen Post, CenturyLink’s Chief Executive Officer, will continue as CEO of the combined company, while Sunit Patel, Level 3’s Chief Financial Officer, will assume the role of CFO.

According to Vertical Systems Group Inc, in the first half of 2016, Level 3 was the second-biggest U.S. provider of ethernet services, second to only AT&T, while CenturyLink was fifth.

CenturyLink shares fell, Level 3 rose

In early trading on Monday, CenturyLink shares fell 8 percent to $27.95 while Level 3 shares rose 7 percent to $57.81. At the same time, Trace, the bond price reporting system of the Financial Industry regulatory body, reported that CenturyLink’s $1.4 billion of bonds, which are to mature in 2022 paying 5.8 percent, dropped 1.56 cents to 103 cents. And according to data provider CMA, the cost to protect against losses on CenturyLink’s notes climbed to 336 basis points, an increase of 35 points.

CenturyLink, one of the largest telephone companies in the U.S., was formed when CenturyTel Inc. acquired Embarq Corp. in 2009 followed by Qwest Communications International Inc. in 2011.

CenturyLink had been exploring the sale of its datacenter business and according to Phil Cusick, an analyst at JPMorgan Chase & Co., “the combination makes a lot of sense given the combination of Level 3’s and CTL’s legacy Qwest national wireline business networks.”

On Monday, CenturyLink reported a third-quarter profit of 56 cents a share after one-time items on revenue of $4.38 billion. Profit per share was higher than Bloomberg’s 55-cent estimate, while the revenue result was consistent with projections. Meanwhile, Level 3 reported earnings of 39 cents a share, falling short of the 42-cent average estimate. Sales fell to $2.03 billion, lower than the $2.07 billion projection.

Both CenturyLink and Level 3 have faced increasing competition from cable providers and smaller competitors who also offer internet and telephone services to businesses. While CenturyLink does offer residential telephone and internet services in a number of cities, it generates around two-thirds of its revenue from business customers.

One of the biggest Telco Deals of the Year!

The acquisition is one of the biggest telecommunications deals of the year. On Friday, Level 3 had a market value of $19.4 billion, with around $11 billion in debt. Meanwhile, CenturyLink was valued at about $16.6 billion, with around $19 billion in debt.

Level 3 assists content distributors such as Netflix with delivery and network services, helping to set aside sufficient servers and transportation capacity to improve load times. With an ever-increasing number of users choosing to stream movies and TV shows over the web, content delivery networks have become increasingly important in allowing distributors to deliver a seamless experience to users. Viewers should experience fewer delays and a decrease in buffering when content is moved closer to users and traffic patterns are effectively managed.

CenturyLink was advised on the deal by Bank of America Corp. and Morgan Stanley, who have  committed to lending the company about $10.2 billion in new secured debt. A fairness option was issued by Evercore Partners Inc. and legal advice was provided by Wachtell, Lipton, Rosen & Katz and Jones Walker.

Level 3 was advised by Citigroup Inc. A fairness option was issued by Lazard Ltd. and legal advice was provided by Wilkie Farr & Gallagher LLP.