CenturyLink confirms it will acquire Level 3 for $34B

corporate sign outside of an office park
Image: CenturyLink

CenturyLink confirmed that it is going to acquire Level 3 Communications for $34 billion, creating what will be the second largest domestic provider and posing a greater threat to AT&T and Verizon in targeting global enterprise customers.

Under terms of the agreement, 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. This implies a purchase price of $66.50 per Level 3 share (based on a CenturyLink $28.00 per share reference price) and a premium of approximately 42 percent based on Level 3's unaffected closing share price of $46.92 on October 26, 2016, the last trading day prior to market speculation about a potential transaction.

RELATED: CenturyLink, Level 3 enter 'advanced' talks to merge, says report

After closing the deal following regulatory approvals, CenturyLink shareholders will own approximately 51 percent and Level 3 shareholders will own approximately 49 percent of the combined company.

Leading the company will be Glen Post, who will continue to serve as CEO, while Level 3’s Sunit Patel will stay on as CFO. At the time the acquisition closes, the current Chairman of CenturyLink's Board will continue to serve as Chairman of the combined company. CenturyLink has agreed to appoint four Level 3 Board members at closing, one of whom will be a representative of STT Crossing, a wholly owned subsidiary of ST Telemedia.

The combined company will be headquartered in Monroe, Louisiana, and will maintain a significant presence in Colorado and the Denver metropolitan area. Level 3 will become a subsidiary of CenturyLink.

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

“When Jeff and I got together a few months ago, we talked about the industry and the possible benefits of bringing these companies together,” said Glen Post, CEO of CenturyLink, during a press conference. “The more we considered the possible benefits of bringing these companies together complementary products and services that we were building, we took a hard look at synergies and said this is a transaction we have to consider and realized that we could put the companies together.”

Jeff Storey, CEO of Level 3 agreed, adding that the combined companies can better pursue new global enterprise opportunities.

“I think the financial benefits speak for themselves, but there are also the market benefits that I saw in deciding to put the two companies together,” Storey said. “Every one of those is addressed better by CenturyLink and Level 3 joining forces and building those capabilities rather than going after them alone.”

A key element of this acquisition is expanding the fiber network. By purchasing Level 3, CenturyLink will gain an additional 200,000 route miles of fiber, including 64,000 route miles in 350 metropolitan areas and 33,000 subsea route miles connecting multiple continents.

Image: CenturyLink (PDF)

Another key factor is enhancing the on-net building reach. CenturyLink says the acquisition of Level 3 will increase its reach by nearly 75 percent to approximately 75,000, including 10,000 buildings in EMEA and Latin America.

“In telecommunications, scale and scope matter and this combination takes two fairly large companies and puts them together and brings to bear our ability to scale each other’s strengths,” Storey said. “If you look at Level 3, we sell a large amount of IP VPNs and when we have to go off-net that reduces our margin and also our ability to really control the customer experience end to end, so by combining the two companies we’ll be able to bring more of those customers on-net.”

Storey said that the new company will provide great reach into more geographic areas and provide greater service depth than either company could have had on their own to serve multi-national global customers, particularly in EMEA and Latin America.

“If you look at CenturyLink selling to global customers, they had historically a disadvantage selling in EMEA and Latin America,” Storey said. “We’ll bring the Level 3 network to their customers and help them expand the products and services and the scope of those products and services.”

In tandem with the fiber assets, CenturyLink will gain a larger set of business network offerings. As a combined company, CenturyLink and Level 3's revenue will be 76 percent derived from business customers and 65 percent of the combined company's core revenue will be from strategic services. The combined company will offer a broader range of services and solutions to meet customers' demand for more bandwidth and new applications in an increasingly complex operating environment.

Additionally, CenturyLink said the acquisition will enable it to enhance its broadband network infrastructure to deliver higher speed copper-based and fiber-based broadband speed for small businesses and consumers.

News that a deal was in tow emerged on Thursday when a Wall Street Journal article first reported that CenturyLink and Level 3 were in advanced talks. At that time, the market responded favorably to a report of a possible deal as CenturyLink and Level 3’s shares rose 14 and 6.1 percent, respectively, in mid-Thursday trading.