CenturyLink Purchase of Level 3 Seen Getting FCC OK
CenturyLink confirmed that it's buying Level 3 in a $34 billion deal that will make it the second largest domestic telecom provider for enterprise customers. Analysts said Monday they continue to expect the deal to get regulatory OK (see 1610280052). The companies expect to close the deal by the end of Q3 2017 and need Hart-Scott-Rodino antitrust review, regulatory approvals by the FCC and certain state commissions, and shareholder votes, CenturyLink said. "Regulators will see the benefits of this transaction once they learn more about the details and the benefits to customers,” CenturyLink CEO Glen Post said on a conference call Monday.
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CenturyLink and Level 3 were at odds in the FCC business data services proceeding, and Post said the buyer won’t adjust its views on BDS. “We will not change our position,” the CEO said. “We look forward to discussing this transaction with the regulators,” he told investors and analysts at another point. The telco separately told the FCC it has concerns about its proposal to cut BDS rates (see 1610310027).
CenturyLink's shareholders will own about 51 percent of the combined company and Level 3 shareholders will have 49 percent, the companies said in a news release. CenturyLink large enterprise customers will benefit from Level 3’s presence in more than 60 countries worldwide, they said. Revenue will be 76 percent derived from business customers, they said. The combined company will be positioned to invest more to spread and increase speeds of its broadband network, they said. The deal adds 200,000 route miles of fiber to the CenturyLink network, including 64,000 miles in 350 metropolitan areas and 33,000 miles of submarine cable connecting multiple continents, they said.
CenturyLink stock sank 12.5 percent to $26.58 in Monday trading, while Level 3 stock rose 3.9 percent to $56.15 in Monday trading. Moody’s placed CenturyLink’s ratings on review for downgrade, citing "higher leverage from the debt incurred to finance the deal, which would be partially offset by the additional scale and growth potential from the acquisition. ... Like many of its peers, CenturyLink's appetite for financial risk has steadily increased over the past few years."
Wells Fargo analyst Jennifer Fritzsche said it’s a good deal for CenturyLink. “This is a very positive transaction as it solves its lack of growth and need for more fiber issue," she wrote investors.
“Regulators might be concerned about the reduction in competition with one player going away, but the companies could plausibly argue that they will be a stronger competitor to AT&T and Verizon, making the deal pro-competitive, and cable has been clear that it would like to move up the food chain to serve larger customers, meaning more competition is coming,” Moffett Nathanson analyst Nick Del Deo emailed us. “The market for commercial wireline services is generally more competitive than the market for residential wireline services. It’s possible that the company might have to divest some assets in particular markets.”
The combination “will not raise serious competitive concerns because, in each of the market segments in which the two companies compete, there are other effective competitors,” Free State Foundation President Randolph May emailed us. “Because so much capital investment is required to construct, operate, and upgrade the telecom networks to provide the ever-increasing bandwidth that both residential and business customers demand, the merger is likely to enhance the ability of the combined company to make such investments and keep pace with other market participants.”
CenturyLink’s Post will be CEO and president, and Level 3 Chief Financial Officer Sunit Patel will be CFO. The new company will be headquartered in CenturyLink’s hometown of Monroe, Louisiana, but will maintain presence in Level 3’s HQ city of Denver and elsewhere in Colorado. “The combined company will be uniquely positioned to meet the evolving and global needs of enterprise customers,” Level 3 CEO Jeff Storey said. The deal is focused on business customers, but CenturyLink has no plans to spin off its consumer division, though that may be an option later, Post said on the call.
The telecom companies also reported Q3 results. CenturyLink revenue declined 4 percent year-over-year to $4.38 billion, it reported. Operating income decreased to $595 million from $656 million. The reduced revenue was due in part to a decline in high-cost support revenue after CenturyLink accepted Connect America Fund Phase 2 funding in the quarter, it said. Level 3 reported $143 million net income in separate Q3 results, up from $1 million in the year-ago quarter, which included a $171 million charge related to the deconsolidation of the company’s Venezuelan subsidiary. Revenue was little changed at $2 billion.