CenturyLink (CTL)sb.cofc.edu/academics/specialty-programs/investment-program/phot… · CenturyLink...

transcript

CenturyLink (CTL)Will DubeEmily ReesAdrian Pereira

Telecommunications Sector AnalystTelecommunications Sector AnalystTelecommunications Sector Analyst

January 2017

Agenda

SCHOOL OF BUSINESS INVESTMENT PROGRAM 2

Investment ThesisCenturyLink OverviewLevel 3 OverviewBackground on MergerMerger CompsLevel 3 ValuationCenturyLink Valuation and TechnicalsCombined Company ValuationReview and Proposal

Investment Thesis

● CTL is in the midst of a merger with LVLT● Typically companies overpay in a merger - we will argue that CTL actually

paid LESS than the average, resulting in a net gain from the purchase ● The combined company will be a major player on the enterprise side of the

telecom industry● 8% dividend yield provides a strong floor for the market price

Industry Overview

“The telecom sector continues to be at the epicenter for growth, innovation, and disruption for virtually any industry.”

About CenturyLink

● Multinational communications company ● Began in 1930● Headquartered in Monroe, Louisiana ● Provide data and communication services ● Work with residential, business, government, and wholesale

customers throughout the United States ● Currently the 3rd largest telecommunications company in

the United States

Business Model

Enterprise Solutions

● 76% of revenue from CenturyLink + Level 3 will come from business customers

● Businesses care about SPEED first

● Wireless connectivity not as important

About CenturyLink: Leadership

Glen PostCurrent CEO

Dean Douglas President of Sales and Marketing

Bill Hurley Chief Marketing Officer

Sunit Patel CFO after the LVLT Merger

The Good and the Bad

The Good

● Business want FAST and RELIABLE networks - CenturyLink provides that

● Growing contribution of strategic services revenues

● Strong growth in IPTV market (Prism TV)

The Bad

● Stagnant top line growth across the board

● Stagnant to slowly declining consumer top line growth

● Legacy services getting phased out

2012 2013 2014 2015

About LVLT

● Products ○ Content Distribution○ Data Networks ○ Security○ Voice UC & IC

● Customers○ Tampa Bay Buccaneers ○ Apple → CDN ○ Netflix → CDN

LVLT Outlook (Pre-merger)

● Increase revenue through Core network services, such as CDN

● focus on their enterprise clients, 60% of revenue

● Q3 - Net Income 143% increase Y/Y

● EBITA Growth of 10%-11%

1 Year

● Early July: stock jumps on reports company is looking for buyer

● Late July: weak Q2 earnings - stock falls

LVLT Merger

● October 31: CenturyLink agrees to buy Level 3 Communications (LVLT) for $34 billion in cash and stock

● Values LVLT at $66.50/share: 42% premium

● Ownership structure: 51% CTL shareholders, 49% LVLT shareholders

● Financing: $10.2 billion acquisition financing, including $2 billion credit line

● After announcement: CTL shares fall 12%

Financials of Combined Company

● Total Revenue: $26B (48% increase)

● Adjusted EBITDA: $11B (46% increase)

● Business revenue: $19B (75% of top line)

● Synergies○ $975 million annual synergies ($850m opex, $125m capex)○ This represents 37% (!!!) of LVLT’s TTM operating expenses○ $685 million one time costs

● Net debt (not including new financing)○ CenturyLink: $19.7 billion○ Level 3: $9.7 billion

● Pro forma net leverage of less than 3.7x

Positives of Merger

● Allows company to deliver the fastest, most reliable broadband network to customers

● Increases CTL’s network by 200,000 miles offiber

● Number of buildings on-network will increase by 75%

● Greater focus on business revenue

● Acquisition of large business clients ○ Complementary to current customer mix○ Greater market share -> greater ROI

● Net Operating Losses of $10 billion

New Industry Overview

The Network

History of Acquisitions

Comps Analysis 1 - Centurylink Acquires Qwest

● April 2010 announced Stock-for-stock 22.4 Billion, and assumed their 11.8 Billion Debt Load ● April 2011 the deal went through, CTL took advantage of Synergy opportunities

Comps Analysis 2 - Centurylink Acquires Savvis

● CenturyLink acquires Savvis for 2.5 Billion Cash and stock-stock exchange● CTL takes advantage of Net Operating Losses, and synergie options similar to the Level 3 Merger●

Post Acquisitions (1 year after)

● Savvis ○ Y/Y 7.6% revenue growth ○ Q2 of 2012, CTL Operating Revenues up 5%

● Qwest○ Operation Synergy Expenses

■ 2012 - 480 Million in synergy run rate (Savings), Spent 61 Million● May 9th, 2012 meet both of their synergy goals

M&A at a Glance

Largest Completed Deals (2010 to date)

LVLT Inputs

LVLT Valuation

Higher Valuation = Lower Premium

● We felt LVLT was undervalued before the merger (almost pitched it instead of TGT)

● With a revised price target of $54.32 at the time of acquisition, this lowers the premium CTL paid to 22.4%

● This doesn’t include $10 billion in NOLs

● Remember: LVLT stock tanked in late July - it is possible they were already discussing terms

Metric LVLT Acquisition Average

Deal Size $34 bn $27.9 bn

EV/EBITDA 8.9 13.2

Premium 22.4% 29%

What if this merger doesn’t happen?

● Key conditions that must be met before merger completes○ HSR Clearance○ FCC Review○ National security approvals○ Certain state regulatory approvals ○ International filings○ Approval by shareholders

● Termination penalties○ CTL: $737.5 million○ LVLT: $471.5 million

● CenturyLink and Level 3 have already completed multiple successful mergers

● We feel CTL as a standalone is undervalued

Industry Peers

3 Year - CTL

1 Year - CTL vs. VOX

CTL Inputs

CTL Valuation

Valuation of CTL + LVLT

The Debt

● Working to secure loans from Bank of America, JP Morgan, and others

● $10.2 billion including $2 billion credit revolver

● Total LTD: $39.6 billion

● Not very levered to begin with (3.7x)

● Dividend payout ratio: 60% in four years

● Base case has combined firm receiving on average $4.3 bn in FCF per year

Interest Rate Risk

● Rising interest rates tend to hurt dividend yielding stocks

● Yellen is not scared about inflation

● Trump has short honeymoon period ○ after 11 months he loses absolute power to pass legislation with Congress

● Infrastructure seems to be the way out ○ honeymoon will hurt those chances ○ no “shovel ready projects”

● No demand pull in liquidity

○ we are flushed with liquidity from QE, etc.

Therefore, we believe that the interest rate cycle will actually be slower than expected.

Overview

Strengths● Strong enterprise business ● Adding international presence ● High dividend

Weaknesses● Low growth ● A large number of

competitors ● Amount of debt

Opportunities● New growth ● New offerings ● New products ● Greater platform

Threats● Raising interest rates ● Merger not going through ● Increasing competition

Proposal

● Buy 782 of CTL at $25.49 for a total of $20,011

Portfolio

Questions?

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