CenturyLink Agrees to Acquire Level 3 at a Big Premium
The decision to acquire Level 3 Communications is not entirely unreasonable, and putting these companies together makes good strategic sense.
At first glance,
CenturyLink’s offer of $66.50 per share for Level 3 is a roughly 40% premium to where the shares were trading prior to rumors of a deal surfacing. A premium of this magnitude ($7 billion in equity value) is likely warranted, given the significant cost savings this deal presents (management expects $975 million annually), the strategic benefits of the combination, and the ability to use Level 3’s net operating losses to reduce taxes over the next several years.
However, our hang-up on valuation stems from the fact that CenturyLink is using its shares to fund 60% of the purchase price, with a fixed exchange ratio that assumes CenturyLink shares are worth $28. We currently value CenturyLink significantly higher, at $36 per share. At our CenturyLink fair value estimate, the purchase price rises to nearly $78 per Level 3 share, a 65% premium equal to about $11 billion. We are still evaluating the deal, but as of now, we expect to reduce our CenturyLink fair value estimate by around 10%.
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