Coverage: CenturyLink to buy Level 3 for $25 billion

CenturyLink Inc. has agreed to purchase Level 3 Communications Inc. for $25 billion in a deal that makes the combined companies more competitive in the communications landscape.

Drew Fitzgerald and Joshua Jamerson of The Wall Street Journal had the news:

Level 3 runs one of the largest internet backbones in the world but has turned its focus to small and midsize business customers to reverse slowing sales growth in its core operations. CenturyLink, traditionally a rural phone company, has sought to upgrade its network with fiber-optic lines in a bid to compete with AT&T Inc., Verizon Communications Inc. and rivals in the cable industry.

”The financial benefits speak for themselves,” Level 3 Chief Executive Jeff Storey said Monday during a conference call with analysts, pointing to nearly $1 billion of expected cost savings from sharing data lines and cutting overlapping jobs. “I believe scale matters.”

The deal would turn CenturyLink—which has grown from a small Louisiana phone provider by scooping up the former Qwest and Sprint Corp.’s landlines—into an even more corporate-focused service provider, with about three quarters of its revenue coming from business customers. The combined company would also keep millions of home internet subscribers, most of whom use slower digital subscriber lines.

CenturyLink CEO Glen Post said the company had no plans to spin off its residential business. “That certainly is an option for us, but not an objective,” he said.

Leslie Picker of the New York Times reports that CenturyLink investors were not impressed:

CenturyLink’s investors were not quite convinced that acquiring Level 3 was the ticket to turn around the company’s recent misfortunes, including competitive pressures from larger cable providers. Shares of CenturyLink fell 12.5 percent on Monday, while shares of Level 3 were up 3.9 percent.

Under the terms of the deal, CenturyLink, based in Monroe, La., will acquire Level 3 for $26.50 in cash and 1.4286 shares of CenturyLink stock for each Level 3 share, according to a statement issued by the companies on Monday.

Based on the closing price of CenturyLink’s shares from Friday, this represents a price of about $69.92 a share. Including Level 3’s $10.9 billion in debt, the transaction amounts to about $36 billion. That represents a premium of almost 50 percent from Level 3’s share price last Wednesday before reports surfaced of a potential deal.

CenturyLink’s shareholders will own 51 percent of the combined company, while Level 3’s will hold the rest.

Alex Sherman and Scott Moritz of Bloomberg News examined what Level 3 brings to CenturyLink:

In addition to CenturyLink’s 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 bonds were the biggest losers in the market on Monday. Its $1 billion of notes maturing in 2024 and paying 7.5 percent fell 4 cents to 104.50 cents at 2:32 p.m. in New York, according to Trace, the bond price reporting system of the Financial Industry regulatory authority.