CenturyLink Inc. (NYSE: CTL) agreed to buy Level 3 Communications Inc. (NYSE: LVLT) for about $34 billion cash and stock in a deal that will create a more formidable competitor in the market for business telecommunications services.
The acquisition values Level 3 at $66.50 a share, the companies said in a statement. That’s about 42 percent above where the Broomfield, Colorado-based company was trading earlier in October, before reports surfaced of a potential acquisition by CenturyLink, which is based in Monroe, Louisiana. The value of the deal includes assumed debt.
Level 3 is one of the largest providers used by Internet services including Netflix Inc. (Nasdaq: NFLX) 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 earlier in Octover.
“Together with Level 3 we will have one of the most robust fiber network and high-speed data services companies in the world," CenturyLink chief executive officer Glen Post said in the statement. He will remain CEO of the combined company, while Level 3 chief financial officer Sunit Patel will be CFO of the new company.
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 company reported third-quarter profit of 56 cents a share, after one-time items, beating the average estimate of 55 cents from analysts polled by Bloomberg, on revenue of $4.38 billion, which matched analysts’ views.
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, gets about two-thirds of its revenue from business customers. For example, Accel-KKR reached a deal with Thunderhead to acquire its Smart Communications division and Genesys Telecommunications Laboratories agreed to buy call center software provider Interactive Intelligence Group Inc. (Nasdaq: ININ).
The acquisition is one of the biggest telecommunications deals of 2016. Level 3 had a market value of $19.4 billion at close on Oct. 28 and has about $11 billion in debt. CenturyLink was valued at about $16.6 billion and has about $19 billion in debt.
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.