Broadband services

CenturyLink Splashes $34B on Level 3 Buy

Boosting its credentials further in the ranks of top-tier telecom companies, CenturyLink today announced that it intends to acquire Level 3 Communications in a cash and stock deal valued at approximately $34 billion including debt. (See CenturyLink Agrees to Acquire Level 3.)

The news follows rumors of a merger late last week and, if completed, will create a company that combines a massive enterprise customer base with a network footprint spanning more than 60 countries. (See Level 3, CenturyLink on Verge of Merger.)

The share price for Level 3 Communications Inc. (NYSE: LVLT) angled higher this morning, up roughly 5% since the end of trading on Friday. CenturyLink Inc. (NYSE: CTL) shares were down, dropping more than 10% since Friday's close of business.

News of the acquisition comes as mega-merger deals are cropping up throughout the telecom and networking industry. Although AT&T Inc. (NYSE: T)'s proposed buyout of Time Warner Inc. (NYSE: TWX) and Qualcomm Inc. (Nasdaq: QCOM)'s proposed acquisition of NXP Semiconductors N.V. (Nasdaq: NXPI) target very different assets, all three deals now in the works highlight the premium executives are placing on gaining scale to best their competitors. (See AT&T's $85B Time Warner Takeover Is a Media Game Changer and Qualcomm Makes $39B Bet on NXP.)

For CenturyLink's part, the company is focusing on the build-up of its enterprise business, which will account for 76% of revenue, or approximately $19 billion, following the close of the transaction. CenturyLink says that 65% of the company's revenue, or $13 billion, will come from strategic services.

CenturyLink also serves the residential market, but does not come close in that sector to the size of competitors like AT&T or the larger US cable providers. Consumer market revenues for the telco in the third quarter were $1.47 billion, down 2.5% from the year-ago quarter thanks largely to declines in wireline voice revenues.

Both CenturyLink and Level 3 also posted quarterly earnings reports today to coincide with the acquisition announcement. CenturyLink reported $4.38 billion in revenues for the quarter, matching analyst estimates, but dropping below the $4.55 billion it earned in the third quarter of 2015. Earnings-per-share came in at $0.56, one penny better than analyst estimates of $0.55 according to StreetInsider.

Level 3 reported $2.033 billion in revenue for the quarter compared to $2.037 billion a year ago, and basic earnings per share of $0.40, down from $0.48 in the third quarter of 2015. Analysts' average consensus estimates were $2.07 billion for revenue and $0.42 EPS, according to News Oracle.

— Mari Silbey, Senior Editor, Cable/Video, Light Reading

KBode 11/2/2016 | 1:23:29 PM
Re: It's all about growing the business business It can, and there's variants like G.Fast, investors just don't want them spending money on uniform deployment, so you get a lot of pockets where the broadband options consist of 100 Mbps cable bundled with TV, or 6 Mbps DSL. I really think we're looking at a massive cable broadband monopoly for years to come in a huge number of markets. That's not a problem for these companies, but it's sure as hell not going to be great for consumers.
jbtombes 11/2/2016 | 12:02:01 PM
Re: It's all about growing the business business CTL was already heavily weighted toward business revenues, a 64% of total. Compare that to T (17%) VZ and CHTR (13% each), as noted in the Q3 earnings deck. This merger pushes the ratio up to 76%, as Mari notes. If the resi broadband story is a sad one, is that because DSL (or VSDL2 or whatever) can't compete with DOCSIS on price/features?
KBode 11/1/2016 | 1:16:20 PM
Re: It's all about growing the business business Seems like a real problem if DSL providers retreat and cable broadband becomes a monopoly...even if wireless develops enough to become a fixed-line alternative (thanks to usage caps). Things could get a bit ugly for consumers in that scenario. 
mendyk 11/1/2016 | 10:19:04 AM
Re: It's all about growing the business business Agree, but as long as the backwater residential services are making a profit, there's no reason to jettison them right away.
danielcawrey 10/31/2016 | 7:03:24 PM
Re: It's all about growing the business business If DSL is in decline, and by all indications it is, it's time for companies like CenturyLink to move towards total enterprise services. This is the impetus for the company to buy a premier provider like Level 3. 
Carol Wilson 10/31/2016 | 3:05:11 PM
Re: It's all about growing the business business CenturyLink does seem to be a tale of two companies. As Karl notes, their DSL services are getting hammered, but my guess is, those customers are folks in less-populated states that are more expensive to serve and CenturyLink may be happen to let cable do it. 

By contrast, they are willing to spend big bucks to get a global network, and to transform their existing operations at a rapid pace as well. 
James_B_Crawshaw 10/31/2016 | 2:44:44 PM
Re: It's all about growing the business business Only 40% of the consideration for LVLT is cash (50% for TWX). Companies can borrow the cash for the remainder on the basis that they are buying a cash generative asset that can service the debt. 

I don't think any vendor would accept shares to provide broadband infrastructure. You can raise debt to fund specific (large) capex projects but CTL's broadband infrastructure upgrades are part of the run-of-the-mill capex that needs to be financed by the operating cash flows of the business. 
KBode 10/31/2016 | 1:08:46 PM
Re: It's all about growing the business business I'm curious how that shakes out as well. They've been seeing some notable losses from frustrated DSL customers that are fleeing to faster cable speeds because CenturyLink is still offering them speeds from 2002. And upgrades remain spotty, at best.

It remains curious that these companies (AT&T included) can't afford upgrading their last mile residential networks, but have endless resources for these mammoth mergers. At some point that has to create problems, doesn't it? Or do they just spin those businesses off to someone that cares?
[email protected] 10/31/2016 | 12:49:28 PM
Re: It's all about growing the business business This is a solid long-term view, I think, and puts CenturyLink in a greater position of strength than if another company (for example, a Webscale giant or overseas Tier 1) acquired Level 3.

The view needs to be long-term, with the ability to support the video, cloud and Industrial IoT needs of businesses. Level 3's assets put CenturyLink in a much better position to play a role in that future, in my view. 
Carol Wilson 10/31/2016 | 12:24:31 PM
It's all about growing the business business So Glenn Post said on the investor call that CenturyLink isn't considering a spinoff of its consumer business, but virtually the entire call was devoted to how the combined company can serve enterprises, particularly multi-national businesses, better and take advantage of scale and scope of the combined company. 

This seems very much a combination of the Level 3 network and the CenturyLink managed services capabilities. Jeff Storey talked about the importance of getting more services on-net, to be able to control the customer experience and also reduce the costs by not having to lease as many servcies. 
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