CenturyLink to Buy Level 3 for $34B
bloomberg.com
bloomberg.com
Take this with a grain of salt, but from what I've gathered doing IP transit related work, Level3 has something of a reputation of being higher quality transit than many of their competitors. They tend to cost more and people seem to be paying it.
Yeah, with the acquisitions they've been making, you can use your home CenturyLink connection, which goes over the CenturyLink backbone cabling, over to CenturyLink's IaaS provider, which hosts an app deployed using CenturyLink's PaaS.
And really, think of CTL as a decades-long rollup of baby Bells in the north central / midwestern US and they make more sense -- just like AT&T is largely a rollup of the southern and western Bells and Verizon is largely a rollup of east coast Bells.
AT&T and Verizon were able to prevent Comcast from becoming a third national competitor (for now), but it looks like CenturyLink will just take their place. Look for them to get into cellular in more than an overbuilding capacity soon though. I will almost guarantee that Sprint ends up with Comcast and T-Mobile with CenturyLink -- though I also wouldn't be surprised if the opposite happens.
Our goal as people who use telecom services should be to get as much diversity in telecom as possible. Right now, it's a two-horse race: AT&T / Verizon and Comcast / Charter / Cox. If, in 10 years, we have a choice between AT&T, Verizon, Comcast and CenturyLink... that will be better.
Small, local competition for ISPs do not make sense over the long term. It may get you fast speeds over the last mile in the short-term, but doesn't get you a fast connection to everywhere else and the investment levels are going to be unable to keep up after the first generation. The oversubscription model benefits from national scale, and even a national last-mile telecom without a national fiber network will have problems matching the cost structure of their competitors (as we recently saw with TimeWarner Cable). The infrastructure doesn't scale operationally or financially otherwise.
CenturyLink is already one of the big players and they'll never enter markets that Comcast, ATT, or Verizon are already in. We're a small ISP and a Level 3 customer. I'm moderately concerned about what this acquisition will mean for companies like us in the long run. The hand that feeds us is now also a competitor.
The market is drastically changing. Wireless has quickly become the center of the telecom industry; look for CTL to jump in there (which would put them in direct conflict with AT&T and Verizon). The FCC rules governing wireless are also a lot more favorable. CTL already overbuilds residential service on top of AT&T/Verizon/Comcast, albeit in select areas that are underserved.
There will still be market space for small ISPs in markets that are too small for the large players to serve (just like there are still small, regional wireless companies) but they'll be fighting over the scraps.
They are entering Comcast's market in Seattle. A lot of places now have two options, where they only had one ~3 years ago.
Then I moved to an area they're not servicing very well. My internet speeds went from 60mbs down and 7mbs up to a paltry 4mbs up and 1mbs down.
I had to switch to Comcast which wasn't so bad, but I got way better service from CL tbh. I've been told they're building out fiber in my area and their 1gb service will be available "soon".
They aren't really competitive in most of Seattle. 6-12 Mbit vs ~50 Mbit at the same pricepoint. I don't hate Comcast that much.
I would love a Glass-Steagall for the telecom industry – long haul and last mile not allowed by the same company. ISPs must peer at local exchanges. Add municipal ownership of the last mile fiber with ISPs leasing capacity to individual residences (allowing you to choose one of many) and the world seems ideal.
I'm lucky enough / chose my home such that I am served by a local ISP which is hooked up to a local exchange. It's great. The biggest bottleneck is usually WiFi, and after that peering. Having the last mile not be the weakest link is great.
It's basically enforced separation of the wholesale and retail markets. The roads that get you to brick and mortar stores are publicly owned, why not the last mile of fiber? Vertical integration is good for some markets, but markets where your customer is captive because you own the lines outside their house, vertical integration is terrible.
It's one of those industries where you have to negotiate with sales people (I hate doing this) to get any pricing information, and it's extremely difficult to gauge quality. That's why I added "take with a grain of salt" to my general perception comment.
Tip for ailing IP transit companies: put your damn pricing on your web site! AWS can do it, you can too. You often offer far better BW rates than the cloud providers do, but you do a horrible job showing it.
On the other hand, I understand transit is a commodity, but not sure I want to see what happens when a "too big to fail" company goes under, in countries that have heavily-privatized backbones.
[1] https://blog.cloudflare.com/bandwidth-costs-around-the-world...
It is interesting that CL seems to be operating out of the old MCI playbook. Here I thought the days of aggregating a bunch of ISPs into a mega communication company were behind us.
I can vouch for this. We have a choice between CL and Comcast here for residential service and I've used both. CL has a pretty solid DSL service but $deity help you if you ever need to call in for some problem you're having with it. Expect to spend multiple-hours on the phone while you're put on hold for extended periods, have your call dropped, get routed to numbers that don't answer, and, if you're lucky, speak to a person who has no idea what you're talking about but might know someone who can help, "let me transfer you"... Rinse and repeat. The only good that I can say about CL is that their come-out-to-your-house techs seem to know more or less what they're doing and have solved DSL and analog line problems for me quickly and without additional pain.
[0] http://www.forbes.com/sites/stevekeen/2015/02/28/what-is-mon...
The restrictions in this light almost do more harm than good since it exonerates the banks (or rather the system) and every time we have a crisis (after people have been making the big bucks for years) we treat it as mysterious and unrelated to the profits made in the 'good' times.
https://en.wikipedia.org/wiki/Basel_III
Note that even though the introduction calls it a voluntary framework, the US and EU have implemented much of it in their regulatory systems.
Read: Debt The First 5,000 Years. It's a life changing book that helps all this stuff make a lot more sense.
http://finance.yahoo.com/news/centurylink-lay-off-3-000-1305...
Okie Dokie
From the OPs article link:
"In a memo issued to employees Wednesday, CenturyLink CEO Glenn Post said that sinking legacy revenue has resulted in a loss of $600 million a year for the company."
Your company is valued at X, you take on Y in loan and invest some of that into, e.g., buying and laying fiber. Your company will now be valued at X+f*Y, where f is some adjustment factor. E.g. you may not get the same money back if you sold the fiber today. On the other hand, that fiber is projected to earn you some money over time.
I do agree those are huge figures, but it could make sense.
In this case, the acquirer also buys out the acquiree's debt. This part of the deal is funded by a loan from Bank of America and Morgan Stanley.
CTL isn't valued at $16B. That's only the market capitalization of its common shares outstanding.
LVLT market cap = $19.4B
LVLT assets = $24.1B (as of FYE15)
CTL market cap = $16.5B
CTL assets = $47.6B (as of FYE15)
On an unrelated note, CTL has $20B in goodwill on its balance sheet. Wow...
edit: [0] http://on.wsj.com/2f0DDdj
There are of course a lot of companies that have extremely valuable brands and IP, but those tend to trade at pretty fair market valuations and don't have an unusually high percentage of goodwill relative to the rest of their assets.
In the case of CenturyLink, that would be a major red flag to me.
In some cases, there is additional value created by an acquisition that can justify that added value, but in many cases it's just a way to justify an irrational overvaluation on a balance sheet.
For example, the last time I looked CTL had lost about $2 billion in market cap after this deal was announced. That's the market saying "you overpaid for this company" or, as I prefer to say "your goodwill valuation is BS."
Wrong. For example "Hewlett-Packard purchased Autonomy for $11 billion in 2011. The purchase price represented a greater than 65 percent premium over the price at which Autonomy was trading at the time of the announcement. Hewlett-Packard recorded $6.9 billion of goodwill and $4.3 billion of other intangible assets in connection with the acquisition."
Thanks for helping me make my point.
Century Link comes along and looks at the value of all the copper in the ground and says that they will pay $1B for it even though on the books it has zero book value. That excess paid becomes good will on Century Link because they paid more for it than book value.
Goodwill is essentially what happens when you pay over book value for an asset.
It's quite common in telecom, because telecom infrastructure investments are generally depreciated over 10 years, but the capital assets still have some value even after they've been depreciated for tax purposes. If they were still listed as capital assets they could be depreciated, so they have to be booked as an asset somewhere.
Can you elaborate on this? Does CTL need to buy back shares so that they can use them to put towards the $15B in stock to put towards the LVLT transaction?
If this is so isn't this the equivalent of cash? Since they need to finance that purchase of stock? How would that not be $10B plus $15B?
If the source of that financing is creditors how do they get paid if not cash? Is this some kind of structured financing?
Think of it more as converting your Level 3 stock into Century Link stock.
The $10B in cash is the $25/share * # of LVLT shares. CTL has to come up with that. It looks like they have $10B in lending ready to go from MS and BAML.
For the stock, CTL can do a lot of things but just need to come up with the shares at the agreed upon conversion factor. Likely, CTL will issue new shares. Current CTL shareholders will hope that the dilutive effects will be offset by the accretive gains from owning a smaller chunk of a bigger company. Alternatively, CTL could use cash on hand (or from asset sales), treasury stock, and more to purchase shares to then hand over. I don't know CTL's plans.
To slightly complicate things, the total assets shown on the annual report of these companies are mostly on their cost basis. During an acquisition like this, they would be 'fair valued', which could result in significant write up or write off compared to the cost basis.
First, there is no strict separation between acquisitions and mergers. It is often somewhere in between.
If CenturyLink is valued at $16.6 billion with $19 billion in debt, that means the company without debt would be worth $35.6 billion. Likewise Level 3 without debt would be worth 19.4 + 11 = $30.4 billion.
The article says that "the value of the deal includes assumed debt", so they are really just paying 34-11= $23 billion for the Level 3 stock (I think).
It also says they are getting $10.2 billion in new debt, meaning they are issuing ~$13 billion worth of new CenturyLink stock, and giving that to current Level 3 shareholders.
If I calculated things right, CenturyLink shareholders will own about 56% of shares in the combined company, with Level 3 shareholders getting 44% plus some cash. The combined company will be worth about $26 billion, and have about $40 billion of debt, so the banks will wield quite a lot of power.
But smaller companies buy bigger companies even without that. In general they just need somebody to fund the acquisition either through debt (they borrow the money) or equity (they issue more stock). Generally it has to be done with debt. The reason it can work in telecom is that business tends to be very recurring revenue so people are willing to lend them money. (Their recurring revenue looks like a bond) An investor can see that two companies have similar businesses and economies of scale, and they want the more efficiently run one to be the acquirer, even if it's the smaller one.
"Our business started as part of a subsidiary of a construction company that created one of the first competitive local exchange carriers, MFS Communications."
If you follow that trail of companies, you feel like you've hit "deep corporate america" where nothing has a founder and everything is a subsidiary of some larger corporate division of something.
A corporation is literally just a group of people acting together. Much as the tech world likes to maintain the image of the visionary individual put forth by the ideology of creativity, that's of actually how the world usually works.
Most innovation happens when groups of people leverage their existing collective abilities together well.
"Interestingly enough, Level3 started out by building out the Qwest network as a contractor building out the fiber. Level3 in exchange for some of the work L3 was given long-term IRUs on the fiber and heavily discounted conduit leases.
Level3 to this day still leases a lot of fiber from CenturyLink (ala Qwest)..."
CenturyLink buying Level3 means that they are basically leasing to themselves :P
"The deal also promises to help CenturyLink by giving it access to about $10 billion in tax credits that Level 3 is carrying on its books, Jennifer Fritzsche, an analyst with Wells Fargo Securities LLC, said last week."
Can anyone comment/speculate on why L3 has $10 billion in tax credits that is "carrying"?
"Tax credits" :P
What explains this? I could understand a small jump in value, but what can be the basis for a $14B gain in a company's value when the only facts that have changed are that a buyer exists? Does the market "believe" that the company's future 42% brighter under the prospect of a buyout, and that belief is captured in the price now?
Market participants know this, especially professional traders, so when the news comes out the fastest players will hop on the stock to make a quick profit. Those who get in on it the fastest when the news breaks enjoy an increase of several percent (or sometimes significantly higher, such as in Linkedin's case!).
The long term reasons and implications are more complex, but from a short term game theoretic perspective if you can quickly act on the knowledge of an acquisition, you can make quite a bit of money. Most people don't have the savvy or infrastructure in place to do this, but if you're drinking coffee in the morning and you see this pop up on your Bloomberg terminal, you'll want to buy within seconds/minutes if you believe the stock is going to jump. You can go so far as to automate the process and place orders for the stock as soon as an algorithm recognizes an acquisition announcement.
There is also the phenomenon where you can reasonably assume that M&A announcements were leaked in hindsight by looking at the option trading history for the stock. Very often you see that in the week or days prior to an announcement, extraordinarily lucky "bets" are placed in the form of call options, indicating that someone knew and acted on the information. Matt Levine has a great Bloomsberg column article on this with several examples.
Why would CenturyLink offer such a large premium? Beats me, I'm not an expert.
1. CONTROL PREMIUM. Buyers pay more to control a company [1]. Control means you can directly effect changes through management. (The flip side is the minority discount.)
There is also the technical aspect of, when buying 100% of a company, needing to make an offer 70% or 90% or whatever (depending on the target's bylaws) of the company's stock will accept. The most willing sellers are reflected in the bid-ask. Less-willing sellers will need more to move. Since you make one bid to everyone, a premium emerges as the price the last least-willing seller you need will accept.
2. SYNERGIES. If you have a billing department and they have a billing department, you can probably do fine with just one billing department. The more similar the acquirer and target, the more of these cost savings and joint growth potentials (e.g. targeted ads over TV) emerge.
The long term holders of the stock obviously believe the company will be worth more than its current trading value (otherwise they would have sold). So a buyer has to pick a value that convinces enough of these shareholders to cash out.
Imagine that you owned a condo in a building and each owner got to vote on whether to sell the whole building. If a buyer wanted to buy the whole building, they are going to have to make an offer with an amount per condo higher than any of the current listings to capture a majority of the condo owners' interest that weren't previously interested in selling.
On that day, there are many people holding the stock who do not sell, because they believe the correct price should be higher. And there are many people who might buy, but do not because they think the price is too high.
For an acquisition you have to pay the price where most of the holders _will_ sell. This price is naturally higher than the price where some holders _did_ sell, on a given day.
Internally (and by, internally, I mean within my team, not within management or anyone who makes decisions of this nature), we'd always seen CenturyLink as an interesting prospect for merger. The two companies' footprints and businesses appeared to compliment each other. It was generally dismissed out of hand because of the consumer side of CentryLink. Level 3 (and even less so with Global Crossing), focused on carriers and Fortune 50-100 businesses as their core and shied away from the more expensive, less profitable consumer facing pieces.
A bit of history for those who weren't around in the 90s: When thinking CenturyLink, think Qwest (and commercials about the little motel in the desert with "Cable TV" replaced by media services delivering every television show and movie produced in the history of ever). They were one of the formerly local telecoms that expanded into long distance/fiber/internet after the 1996 telecom deregulation[0].
Level 3's business is Carrier and Enterprise with much of the Enterprise piece coming from the Global Crossing side of it because, at the time, we effectively couldn't compete with Level 3. We'd come in to bid a project at a price we could eek out a small profit on and would be undercut because they owned far more local which had the effect of lower cost of access and lower complexity for the company we were selling to. Our focus was Enterprise where the margins were higher, we could work with other carriers to provide the services (often Level 3) and step in with a better understanding (and willingness to "do practically anything" to win the contract -- our CEO, after all, was John Legere and the way he runs T-Mobile came from the way he ran Global Crossing: "Hug the Customer" was a mantra).
Level 3 (like all telecoms) is a run to the bottom as far as price is concerned. Cost of access is pretty much it in this business. The expense is so large it eclipses pretty much everything else. Being able to move more things onto your own network reduces that expense (and in-turn results in revenue from others paying you for access to those local components). This fits well with CenturyLink.
The rumblings of this deal internally were strong over the last few months (I don't work there any longer and I heard the rumors[1]). Since this had come up from time to time, I wasn't surprised to hear it again and it still came with the difficulty of figuring out how a deal like that would work. Internally, most employees assumed it'd be a Level 3 purchase of CenturyLink, but a look at the fundamentals of the two businesses made something like that wishful thinking on the part of employees who are really tired of all of the layoffs and really didn't want to see a large one that would come as a result of being purchased.
This will be an interesting transition for the employees of Level 3 proper. They're used to doing the buying and they're actually more used to being the company that comes in, strips the company they purchased (of staff) and imposing the "Level 3 way" on the purchased entity. It was clear that was their position during the Global Crossing merger and morale became greatly affected when some Global Crossing employees took leadership positions and imposed "The Global Crossing way" on Level 3. This resulted in a pretty dramatic culture clash that wasn't really resolved even by the time I left (which was shortly after the TW Telecom merger!). At least at that point they were still suffering getting the various pieces/parts of the company together and operating as a single, well oiled, machine. Adding this to the mix will further complicate those efforts. Level 3 was known for being good at making a purchase and bad at integrating that purchase. I think they did a better job with the Global Crossing and TW acquisitions, but "better" was in comparison to the "abysmal" job they did with the six that were there prior. They still have a history (and current?) reputation of shedding jobs about every 6 months (5-10% across the board) that despite having a better few years, didn't change after I left[3]. They have difficulties hiring top talent as a result, though I'm sure this problem exists across telecom unless you're one of the two big guys.
Apologies for the lengthy and poorly revised post. The speculation contained within is my own and has not been influenced by internal employees -- and may be wildly off since I haven't been an employee there for well over a year, but I thought I'd share in case it spurs further discussion that irons out some of the wrinkles. This will be an interesting change in the landscape of telecom, putting a really large competitor against some of the "bigs" who's reputation is best summed up by this SNL sketch: https://www.youtube.com/watch?v=CHgUN_95UAw
[0] Which is in and of itself a terrible description. It was less a "deregulation" than a "re-regulation" and like all government regulations of this kind, it defined a set of "winning and losing business strategies" in this sector that were different than the strategies that existed before. And a set of tricks/arbitrages that would create entirely new businesses designed to provide nearly free services by leveraging cost of access (in a quasi tariff style).
[1] Before I get anyone in trouble, the rumors I heard were not from people who would have been in any position to know about something like this and were little more than the speculation of previous years ... along the lines of "wouldn't it be great?". I was able to connect the dots, though, by discovering that certain of my former coworkers were unusually busy -- so busy that I couldn't get in touch with them due to their workload. Knowing what they were often involved in, and combining the increase in talk about CenturyLink led me to fully believe this deal was going to land at some point. As a result, I didn't do any stock transactions to avoid the appearance of having "insider information" that I didn't reliably or accurately have.
[2] A look at the fundamentals of both business indicated that as wishful thinking. It was clear to me if there was going to be a purchase, it was Level 3 who was getting bought.
[3] This was a small bit of my motivation for leaving. I'd been through 30-35 "Reductions in Force" and came out still employed and had continued to have the confidence of management up to the VP level, so I was not concerned about losing my job, but all of those "RIF"s take a toll on you. I'm still amazed, to this day, how efficiently our process for laying off employees had become. We had entire systems/applications built for the task and it was these sorts of things. That sort of thing bleeds into the culture of the company and it was a culture I had grown very tired from.
At the end of the day, if you modulate a signal at higher and higher rates, it takes more and more bandwidth. That's your real limiting factor.
For relatively short reaches the modulation order will increase. This improves the spectral efficiency. For longer reaches lower order modulation will be needed but the baud rate can increase. We can can however use other wavelength bands like L band to double the capacity. You are already seeing this in new submarine cables.
Leaving my mistake for context.
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L3 is also a defense contractor. I wonder what happens when a company is purchased for one line of business, but is under contract on other, very different, lines of business.