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CenturyLink-Level 3 Communications Merger Faces Objection


The much-hyped merger between CenturyLink Inc. CTL and Level 3 Communications Inc. LVLT recently faced objections from two California-based consumer advocacy groups as per a FierceTelecom report. The deal was opposed on grounds of consolidation of wholesale and retail fiber in one company. The consumer advocacy groups include TURN, The Greenlining Institute and the California Public Utilities Commission (CPUC) and the California Emerging Technology Fund (CETF).

Both companies provide communications services like data, voice and video transmission for large enterprises. Notably, Level 3 Communications is the provider of one of the largest Internet backbone in the world and the leading U.S. fiber-optic network service provider.

The completion of the proposed merger will increase CenturyLink's network by 200,000 route miles of fiber including 64,000 route miles in 350 metropolitan areas and 33,000 subsea route miles connecting multiple continents. CenturyLink's on-net buildings are expected to increase by nearly 75% to approximately 75,000, including 10,000 buildings in Europe, the Middle East and Africa and Latin America. Therefore, the merged entity will become a formidable challenger to their larger counterparts.

The consumer advisory groups are keen on monitoring the merged entity’s effect on other wireless operators and service providers in the long run. Meanwhile, the recent protests from Frontier Communications Corporation FTR and Windstream Holdings Inc. WIN on accusing Level 3 Communications for unfair billing and payment practices, added fuel to the fire. The companies in protest are concerned that the larger merged unit may misuse their broader market power, hampering rural broadband deployment.

This came as a small hindrance for CenturyLink and Level 3 Communications, who might not have expected any type of distortions in getting state regulatory approvals.

In Mar 2017, both the companies moved a step closer to completing their proposed merger amid overwhelming approval of their shareholders. About 96.3% of CenturyLink shareholders and more than 81.2% of Level 3 Communications shareholders gave their nod to the deal. In Nov 2016, CenturyLink inked an agreement with Level 3 Communications through which the former will acquire the latter in a cash and stock transaction. Total deal size is approximately $34 billion including debt. The equity value of this deal is approximately $25 billion. The combined entity is likely to generate $975 million of annual cash synergies.

Despite the merger protests, CenturyLink remains positive in getting the other necessary state approvals and complete the deal by the end of third quarter of 2017. At the end of the first quarter of 2017, CenturyLink gained 14 state PUC approvals.

The price performance of both the companies amid such regulatory issues is encouraging. Shares of Level 3 Communications gained 3.0% but failed to beat the Zacks sub-categorized Communication Infrastructure industry’s growth of 4.6%, over the past three months.

Meanwhile, shares of CenturyLink inched up 1.5% while the Zacks classified Wireless National industry contracted 5.0%, over the same time frame.

Both CenturyLink and Level 3 Communications currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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