We have a negative stance on CenturyLink Inc. (CTL) for the long term, despite the expected synergies from the Embarq, Qwest and Savvis.
Although the third-largest U.S. landline operator continues to grow its broadband customer base and associated revenues, it remains challenged by the decline in fixed voice access lines. The company faces intense competition from cable TV operators which are aggressively offering traditional voice service through their networks.
The company’s second quarter earnings also failed to impress. Earnings per share came nowhere near the Zacks Consensus Estimate and the year-ago earnings. Higher-than-expected depreciation and amortization expenses related to the Qwest acquisition were responsible for the lackluster performance. However, the acquisition led to improved revenue during the quarter.
Acquisitions and mergers will provide CenturyLink a competitive edge over its two major rivals –– AT&T Inc. (T) and Verizon Communications Inc. (VZ). While the Embarq, Qwest and Savvis acquisition may yield a number of operational benefits and cost synergies, significant integration challenges may impede future operating performance.
The integration of Qwest will incur approximately $650 million to $800 million of operating costs over three to five years and approximately $150 million to $200 million in one-time capital costs.
CenturyLink has to integrate several systems and procedures including re-branding, billing, management information, purchasing, payroll and benefits, fixed asset, lease administration and regulatory compliance. In addition, the combined company will have to expand its services to large urban areas where CenturyLink has limited operating experience.
Moreover, the company continues to operate with a high debt level that currently stands at roughly $19.7 billion compared with $7.3 billion at the end of 2010. The acquisition of Embarq, Qwest and Savvis significantly elevated CenturyLink’s debt level, thereby impairing its balance sheet.
Hence, we are maintaining our long-term Underperform rating on CenturyLink. For the short term, the stock retains a Strong Sell rating with the Zacks #5 Rank.
CENTURYLINK INC (CTL): Free Stock Analysis Report
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VERIZON COMM (VZ): Free Stock Analysis Report
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