Morningstar

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.

Securities In This Article
Lumen Technologies Inc Ordinary Shares
(LUMN)

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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About the Author

Michael Hodel, CFA

Sector Director
More from Author

Michael Hodel, CFA, is a sector director, AM Communication Services, for Morningstar*. He covers U.S. telecom service providers and related firms, including AT&T, Verizon, and Comcast. His team covers media companies, global telecom service providers, and owners of telecom infrastructure, such as wireless towers and data centers. The team’s research focuses on the role that evolving networking technologies, consumer habits, and industry structures play in shaping the competitive advantages and disadvantages facing firms under coverage.

Hodel joined Morningstar in 1998, initially serving within the equity data group, responsible for collecting financial information on thousands of firms. Prior to his current position, he spent two years as a portfolio manager for Morningstar Investment Management, LLC. Previously, he served as a technology strategist responsible for telecom research, chair of Morningstar’s Economic Moat Committee, and a senior member of Morningstar’s corporate credit ratings initiative.

Hodel holds a bachelor’s degree in finance, with highest honors, from the University of Illinois at Urbana-Champaign. He also holds a master’s degree in business administration from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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