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

(Bloomberg) -- CenturyLink Inc. agreed to buy Level 3 Communications Inc. for about $34 billion in cash and stock, creating a more formidable competitor 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. That’s about 42 percent 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 value of the deal includes assumed debt.

Fiber Diet

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

Level 3 is one of the largest providers used by internet services including Netflix Inc. and Google to route traffic across the web, operations that would bolster CenturyLink’s core offerings to businesses. The deal also promises to help CenturyLink by giving it access to about $10 billion in tax credits that Level 3 is carrying on its books, Jennifer Fritzsche, an analyst with Wells Fargo Securities LLC, said last week.

CenturyLink Chief Executive Officer Glen Post will remain CEO of the combined company, while Level 3 Chief Financial Officer Sunit Patel will be CFO.

Level 3 was the second-biggest U.S. provider of ethernet services -- running high-bandwidth internet connections for companies -- in the first half of this year, trailing only AT&T, according to Vertical Systems Group Inc. CenturyLink was fifth on the list.

CenturyLink shares fell 8 percent to $27.95 in early trading Monday in New York. Level 3 shares rose 7 percent to $57.81.

CenturyLink’s $1.4 billion of bonds paying 5.8 percent and maturing in 2022 dropped 1.56 cents to 103 cents at 8:31 a.m. in New York, according to Trace, the bond price reporting system of the Financial Industry regulatory authority. The cost to protect against losses on the phone company’s notes jumped 35 basis points to 336 basis points, according to data provider CMA.

‘A Lot of Sense’

CenturyLink, which has been exploring the sale of its data center business, 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 3’s and CTL’s 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 on Monday reported third-quarter profit of 56 cents a share, after one-time items, beating the 55-cent average of analysts’ estimates compiled by Bloomberg, on revenue of $4.38 billion, which matched projections. Level 3 reported earnings of 39 cents a share, short of the 42-cent average estimate. Its sales 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 and Seattle, gets about two-thirds of its revenue from business customers.

The acquisition is one of the biggest telecommunications deals of the year. Level 3 had a market value of $19.4 billion at Friday’s 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 provides so-called content-delivery network services, particularly to Netflix. With more people streaming TV shows and movies over the web, distributors like Netflix have to arrange with a content delivery network to set aside enough servers and transportation capacity for faster load times. By moving the content closer to users and managing traffic patterns viewers can benefit from less delays 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 secured debt. Evercore Partners Inc. issued a fairness opinion while Wachtell, Lipton, Rosen & Katz and Jones Walker provided legal advice.

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