CenturyLink Inc. (CTL) has completed its acquisition of Savvis Inc.
The information technology (IT) services provider cost CenturyLink $2.5 billion in cash and stock, valued at $40 per share.
CenturyLink paid Savvis stockholders $30 per share in cash and $10 in CenturyLink’s shares to close the transaction. Additionally, CenturyLink also financed approximately $546 million of Savvis' debt.
The merger will allow CenturyLink to tap potential opportunities in cloud services. It also highlights CenturyLink’s enthusiasm to enter the market for corporate IT services delivered over the Internet rather than an in-house department. CenturyLink is seeking to expand its advanced business in order to offset declining revenues from its traditional fixed line business.
Additionally, the merger provides CenturyLink an edge over its competitor Verizon Communications Inc. (VZ) with greater scale and operational efficiency. The deal is expected to improve CenturyLink's revenue, EBITDA and free cash flow. The merger will be accretive to CenturyLink’s free cash flow in the initial year and generate cost synergies of roughly $70 million. As a combined entity, CenturyLink and Savvis will operate 48 data centers in North America, Europe, and Asia; a healthy national 207,000 route-mile fiber network; and a 190,000-mile global access network.
Telecommunication carriers are rapidly entering the cloud computing business due to increased competition and changing consumer habits. This will help operators to differentiate their products and services and pave the way for strategic alliances between telecom and IT companies.
We believe the growth momentum for CenturyLink’s broadband Internet business is more than offset by losses in the fixed voice access lines. While the merger with Embarq, the Qwest acquisition completed earlier this month and the acquisition of Savvis may eventually yield a number of operational benefits and cost synergies, significant integration challenges may impede future operating performance. In addition, competitive threats, increased investments, lower revenue and earnings, as well as a high debt level compel us to have a negative outlook on the stock.
Hence, we have downgraded our recommendation on CenturyLink to Underperform. However, for the short term (1-3 months) the stock holds a Zacks #3 (Hold) Rank.
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