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

CenturyLink Inc. agreed to buy Level 3 Communications Inc. for about $34 billion in cash and stock, creating a more formidable challenger 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. Thats about 42 percentage 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 bargain, excluding debt, is about $24 billion.

Both companies have fought against larger challengers — AT& T Inc. and Verizon Communications Inc. — in the business services marketplace. Investors sent CenturyLink shares down the most in 3 1/2 years on concern the company is overpaying and piling on debt to acquire a company whose sales growth has stagnated in a heatedly competitive 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 dedicates CenturyLink about $10 billion in tax credits that Level 3 is carrying on its books. CenturyLink will be implemented by less than$ 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 percentage to $26.59 at 2:23 p.m. Monday in New York. Level 3 shares rose 4.5 percent to $56.50, still $10 below the offer value.

Company Leadership

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

Storey didnt outline his plans once the deal is complete. He has said hell work with Post to see what the best role could be for him, said a company representative. If Storey leaves after the consolidation shuts, he would get a package valued at $26.9 million, on the basis of the $66.50 per share offer price. That includes an $8.74 million cash severance payment and $18.1 million of equity awardings that would be subject to accelerated vesting, according to data compiled by Bloomberg. The figure doesnt include performance shares he may have been granted in 2016 that havent been disclosed by the company.

In addition to CenturyLinks windfall in tax credits, Level 3 also has advanced network security products that CenturyLink absence. 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 bargain is expected to close by the end of 2017.

The deal would not face undue impediments 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 operate high-bandwidth internet connections for companies, trailing merely AT& T, according to Vertical Systems Group Inc. CenturyLink was fifth on the list.

CenturyLinks bonds were the most difficult losers in the market on Monday. Its$ 1 billion of notes maturing in 2024 and paying 7.5 percentage fell 4 cents to 104. 50 pennies at 2:32 p.m. in New York, according to Trace, the bond price reporting system of the Financial Industry regulatory authority.

Leverage is going up significantly, said Stephen Flynn, a Bloomberg Intelligence analyst. If youre an existing CenturyLink bondholder, you now have another$ 8 billion or so of indebtednes thats ahead of you in line.

Fiber Diet

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

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

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 3s and CTLs 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 centre 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 new challenges that may have brought the companies into discussions.

3Q Results

CenturyLink reported third-quarter earning of 56 pennies a share, after one-time items, beating the 55 -cent median of analysts estimates compiled by Bloomberg, on revenue of $4.38 billion, which matched projections. Level 3 reported earnings of 39 pennies a share, short of the 42 -cent median estimation. Its marketings 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 bargains of the year. Level 3 had a market value of $19.4 billion at Fridays 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 are exploited by internet services including Netflix Inc. and Google to route traffic across the web, operations that would bolster CenturyLinks core offerings to businesses.

Level 3 offer so-called content-delivery network services, particularly to Netflix. With more people streaming TV indicates and movies over the web, distributors like Netflix have to arrange with a content delivery network to set aside enough servers and transportation capability for faster loading periods. By moving the content closer to users and managing traffic patterns spectators can benefit from less postpones 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 procured debt. Evercore Partner Inc. issued a fairness opinion while Wachtell, Lipton, Rosen& Katz and Jones Walker legal advice.

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

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