Level 3 Communications, Inc. (NYSE:LVLT) and Centurylink Inc (NYSE:CTL) recorded opposite moves after approval of Centurylink’s $34 billion deal to buy the networking firm. The shares price of Level 3 is close to 52-week high, while the other one is trading close to its all-time low since February. The specifics of the agreement, a 49% premium to LVLT’s closing price before deal, may have CenturyLink’s shareholders balking.
The significance
Despite that impact, the news may prove positive for CenturyLink’s dividend, which is probably more secure. Improved free cash flow can help the combined company in enhancing financial flexibility and considerably lower its payout ratio. The company anticipates to maintain its yearly dividend of $2.16 per share.
This improved scale afforded by the merged firm is projected to generate yearly run-rate cash synergies of $975 million, primarily from the removal of systems consolidation, duplicative functions, and increased capital and operational efficiency. The deal should also benefit from nearly $10 billion in net operating losses owned by Level 3.
The details
CenturyLink and Level 3 recently reported that CenturyLink will buy Level 3 in a stock and cash worth approximately $34 billion, including the debt assumption. Level 3 shareholders will obtain 1.4286 shares of CTL stock and $26.50 per share for each LVLT share they own, which indicates a purchase price of $66.50 per LVLT share.
Upon the closing of the deal, CenturyLink investors will own nearly 51% and Level 3 stockholders will own around 49% of the combined firm. The combined firm will have almost $19 billion in pro forma business sales and $13 billion in business strategic revenue.
Combined entity is projected to have better revenue growth, adjusted EBITDA margins and pro forma net leverage of not more than 3.7x at close. It will also benefit from Level 3’s almost $10 billion of net operating losses. This amount of net operating loss will substantially lessen the combined firm’s net cash tax cost over the coming years, positioning it to produce considerable free cash flow. The company anticipates to maintain its yearly dividend of $2.16 per share.
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