CenturyLink pays 42% premium in $34 billion deal to acquire Level 3

Rural telecom giant CenturyLink, which offers broadband Internet, TV and phone service to more than 45,000 commercial and residential customers in Arkansas, announced after the close of business Monday (Oct. 31) it would acquire rival Level 3 Communications in a cash and stock deal valued at $34 billion, including debt.

Under terms of the deal, Level 3 shareholders will receive $26.50 per share in cash and a fixed exchange ratio of 1.4286 shares of CenturyLink stock for each Level 3 share they own, which implies a purchase price of $66.50 per Level 3 share and a 42% premium to Level 3’s closing price of $46.92 on Oct. 26. Upon the closing of the transaction, CenturyLink shareholders will own approximately 51% and Level 3 shareholders will own the remaining 49%.

Company officials said the combined company will have the ability to offer CenturyLink’s larger enterprise customer base the benefits of Level 3’s global footprint with a combined presence in more than 60 countries. In addition, the combined company will be positioned to further invest in the reach and speeds of its broadband infrastructure for small businesses and consumers.

“The digital economy relies on broadband connectivity, and together with Level 3 we will have one of the most robust fiber network and high-speed data services companies in the world,” said CenturyLink CEO and President Post. “This transaction furthers our commitment to providing our customers with the network to improve their lives and strengthen their businesses. It is this focus on providing fiber connectivity that will continue to distinguish CenturyLink from our competitors.”

Post said CenturyLink shareholders will benefit from the significant synergies and financial flexibility provided by the combined company’s revenue growth and strong cash flow. For employees, Post and Level 3 President and CEO Jeff Story said the deal will bring together two highly customer-focused organizations and provide growth and advancement opportunities the companies could not offer separately.

Once the deal is complete, CenturyLink’s network would increase by 200,000 route miles of fiber, which includes 64,000 route miles in 350 metropolitan areas and 33,000 subsea route miles connecting multiple continents.

The combined company will have approximately $19 billion in pro forma business revenue and $13 billion in business strategic revenue, for the trailing twelve months ended June 30, 2016. Together, CenturyLink’s and Level 3’s revenue will be 76% derived from business customers, and 65% of the combined company’s core revenue will be from strategic services.

CenturyLink said it expects the transaction to be accretive to free cash flow in the first full year following the close of the transaction and significantly accretive on an annual run-rate basis thereafter. Furthermore, the transaction will be accretive to CenturyLink’s existing growth profile with additional upside opportunities, including the ability to deploy CenturyLink’s and Level 3’s product portfolio across the combined customer bases. With increased network scale, and dense local metro areas and global reach, the combined company will be positioned to further expand internationally.

Both companies said the increased scale from the deal is expected to generate $975 million of annual run-rate cash synergies, primarily from the elimination of duplicative functions, systems consolidation, and increased operational and capital efficiencies. Company officials did not say how many employees would lose their jobs.

After the close of the transaction, Post will continue to serve as CEO and president and Sunit Patel, executive vice president and chief financial officer of Level 3, will serve as chief financial officer of the combined company.

The combined company will be headquartered in Monroe, La., and will maintain a significant presence in Colorado and the Denver metropolitan area.

In trading today on the Nasdaq stock exchange, CenturyLink shares were down nearly 6% or $1.53 at $25.06. Level 3’s stock was also trading lower at $54.25, down $1.90 or 3.4%.