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

By Pino Vallejo

CenturyLink Inc. agreed to buy Level 3 Communications Inc. for about $34 billion in cash and stock, creating a more formidable competitor to AT&T Inc. in the market to handle heavy internet traffic for businesses.

The acquisition values Level 3 at $66.50 a share, the companies said in a statement Monday. That’s about 42 percent above where the Broomfield, Colorado-based company was trading last week, before reports surfaced of a potential acquisition by CenturyLink, which is based in Monroe, Louisiana. The equity value of the deal, excluding debt, is about $24 billion.

Both companies have struggled against larger competitors — AT&T Inc. and Verizon Communications Inc. — in the business services market.

“We see this as addressing the opportunities in the enterprise business,” Level 3 Chief Executive Officer Jeff Storey said in an interview. “This is very consistent with the strategies at CenturyLink,” and will help us respond to things like the accelerating demand for network bandwidth, he said.

The deal gives CenturyLink about $10 billion in tax credits that Level 3 is carrying on its books. CenturyLink will use less than $2 billion a year of the accumulated net operating losses as credit against taxes, the executives said on a conference call Monday.

CenturyLink sank 12 percent to $26.67 at 12:14 p.m. Monday in New York, its biggest decline in more than 3 1/2 years. Level 3 shares rose 4.7 percent to $56.58, still $10 below the offer value.

Company Leadership

CenturyLink Chief Executive Officer Glen Post will remain CEO of the combined company, while Level 3 Chief Financial Officer Sunit Patel will be CFO. Post and Storey started deal talks about two months ago and discussions accelerated from there, they said in an interview.

In addition to the windfall in tax credits, Level 3 also has advanced network security products that CenturyLink lacked. And Level 3 will be able to sell its customers some of the software tools that CenturyLink has developed to manage networks, according to the executives. The deal is expected to close by the end of 2017.

The deal “would not face undue hurdles” in winning regulatory approval, analysts at MoffettNathanson LLC said in a note. The transaction needs clearance from antitrust authorities and from the Federal Communications Commission, the companies said in the statement.

In the first half of the year, Level 3 was the second-biggest U.S. provider of ethernet services, which run high-bandwidth internet connections for companies, trailing only AT&T, according to Vertical Systems Group Inc. CenturyLink was fifth on the list.

CenturyLink’s $1 billion of bonds paying 7.5 percent and maturing in 2024 dropped 3 cents to 105.5 cents at 11:04 a.m. in New York, according to Trace, the bond price reporting system of the Financial Industry regulatory authority. The cost to protect against losses on the phone company’s notes jumped 38 basis points to 339 basis points, according to data provider CMA.

Fiber Diet

Both companies have amassed giant networks to haul internet traffic through deals over the years.

Year Acquisition CenturyLink Level 3 2014 TW Telecom Inc. $5.90B 2011 Savvis $1.70B 2011 Global Crossing $1.40B 2011 Qwest $12B 2009 Embarq $6B 2007 Broadwing $1.40B 2005 WilTel $0.80B Total billions $19.70B $9.50B

CenturyLink is one of the biggest phone companies in the U.S., formed after CenturyTel Inc. bought Embarq Corp. in 2009 and acquired Qwest Communications International Inc. two years later.

“The combination makes a lot of sense given the combination of Level 3’s and CTL’s legacy Qwest national wireline business networks,” Phil Cusick, an analyst at JPMorgan Chase & Co., said in a note Monday, referring to CenturyLink by its ticker symbol.

CenturyLink is in the final stages of discussions to sell its data center business, and the company expects to have an announcement in the coming weeks, Post said.

To coincide with the deal announcement, the companies reported third-quarter results Monday, with both experiencing revenue declines from a year earlier. The slumping sales underscore some of the challenges that may have brought the companies into discussions.

3Q Results

CenturyLink reported third-quarter profit of 56 cents a share, after one-time items, beating the 55-cent average of analysts’ estimates compiled by Bloomberg, on revenue of $4.38 billion, which matched projections. Level 3 reported earnings of 39 cents a share, short of the 42-cent average estimate. Its sales fell to $2.03 billion, compared with the $2.07 billion prediction of analysts.

Both companies have contended with growing competition from cable providers and other smaller rivals offering internet and phone connections for businesses. CenturyLink, which also offers residential landline phone and internet services in cities such as Phoenix, Denver and Seattle, gets about two-thirds of its revenue from business customers.

The acquisition is one of the biggest telecommunications deals of the year. Level 3 had a market value of $19.4 billion at Friday’s close and has about $11 billion in debt. CenturyLink was valued at about $16.6 billion and has about $19 billion in debt.

Aiding Netflix

Level 3 is one of the largest providers used by internet services including Netflix Inc. and Google to route traffic across the web, operations that would bolster CenturyLink’s core offerings to businesses.

Level 3 provides so-called content-delivery network services, particularly to Netflix. With more people streaming TV shows and movies over the web, distributors like Netflix have to arrange with a content delivery network to set aside enough servers and transportation capacity for faster load times. By moving the content closer to users and managing traffic patterns viewers can benefit from less delays and buffering of shows.

Bank of America Corp. and Morgan Stanley advised CenturyLink on the deal. Those two banks have committed to lending the company about $10.2 billion in new secured debt. Evercore Partners Inc. issued a fairness opinion while Wachtell, Lipton, Rosen & Katz and Jones Walker provided legal advice.

Level 3 was advised by Citigroup Inc., with a fairness opinion from Lazard Ltd., and Wilkie Farr & Gallagher LLP gave legal advice.