Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
CenturyLink (CTL)Will DubeEmily ReesAdrian Pereira
Telecommunications Sector AnalystTelecommunications Sector AnalystTelecommunications Sector Analyst
January 2017
1
Agenda
SCHOOL OF BUSINESS INVESTMENT PROGRAM 2
Investment ThesisCenturyLink OverviewLevel 3 OverviewBackground on MergerMerger CompsLevel 3 ValuationCenturyLink Valuation and TechnicalsCombined Company ValuationReview and Proposal
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
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
3
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Industry Overview
4
“The telecom sector continues to be at the epicenter for growth, innovation, and disruption for virtually any industry.”
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
About CenturyLink
5
● 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
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Business Model
6
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Enterprise Solutions
7
● 76% of revenue from CenturyLink + Level 3 will come from business customers
● Businesses care about SPEED first
● Wireless connectivity not as important
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
About CenturyLink: Leadership
8
Glen PostCurrent CEO
Dean Douglas President of Sales and Marketing
Bill Hurley Chief Marketing Officer
Sunit Patel CFO after the LVLT Merger
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
The Good and the Bad
9
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
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
About LVLT
10
● Products ○ Content Distribution○ Data Networks ○ Security○ Voice UC & IC
● Customers○ Tampa Bay Buccaneers ○ Apple → CDN ○ Netflix → CDN
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
LVLT Outlook (Pre-merger)
11
● 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%
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
1 Year
12
● Early July: stock jumps on reports company is looking for buyer
● Late July: weak Q2 earnings - stock falls
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
LVLT Merger
13
● 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%
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Financials of Combined Company
14
● 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
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Positives of Merger
15
● 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
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
New Industry Overview
16
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
The Network
17
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
History of Acquisitions
18
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Comps Analysis 1 - Centurylink Acquires Qwest
19
● 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
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Comps Analysis 2 - Centurylink Acquires Savvis
20
● 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●
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Post Acquisitions (1 year after)
21
● 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
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
M&A at a Glance
22
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Largest Completed Deals (2010 to date)
23
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
LVLT Inputs
24
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
LVLT Valuation
25
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Higher Valuation = Lower Premium
26
● 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%
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
What if this merger doesn’t happen?
27
● 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
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Industry Peers
28
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
3 Year - CTL
29
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
1 Year - CTL vs. VOX
30
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
CTL Inputs
31
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
CTL Valuation
32
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Valuation of CTL + LVLT
33
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
The Debt
34
● 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
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Interest Rate Risk
35
● 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.
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Overview
36
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
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Proposal
37
● Buy 782 of CTL at $25.49 for a total of $20,011
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
Portfolio
38
Co
llege
of
Ch
arle
sto
n In
vest
men
t Pr
ogr
am
39
Questions?
