CenturyLink (CTL) College of Charleston Investment Program. Will Dube Emily Rees Adrian Pereira

Transcription

1 January 2017 CenturyLink (CTL) Will Dube Emily Rees Adrian Pereira Telecommunications Sector Analyst Telecommunications Sector Analyst Telecommunications Sector Analyst 1

2 Agenda Investment Thesis CenturyLink Overview Level 3 Overview Background on Merger Merger Comps Level 3 Valuation CenturyLink Valuation and Technicals Combined Company Valuation Review and Proposal SCHOOL OF BUSINESS INVESTMENT PROGRAM 2

3 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

4 Industry Overview The telecom sector continues to be at the epicenter for growth, innovation, and disruption for virtually any industry. 4

5 About CenturyLink 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 5

6 Business Model 6

7 Enterprise Solutions 76% of revenue from CenturyLink + Level 3 will come from business customers Businesses care about SPEED first Wireless connectivity not as important 7

8 About CenturyLink: Leadership Glen Post Current CEO Dean Douglas President of Sales and Marketing Bill Hurley Chief Marketing Officer Sunit Patel CFO after the LVLT Merger 8

9 The Good and the Bad The Good The Bad Business want FAST and RELIABLE networks - CenturyLink provides that Stagnant top line growth across the board Growing contribution of strategic services revenues Stagnant to slowly declining consumer top line growth Strong growth in IPTV market (Prism TV) Legacy services getting phased out

10 About LVLT Products Content Distribution Data Networks Security Voice UC & IC Customers Tampa Bay Buccaneers Apple CDN Netflix CDN 10

11 LVLT Outlook (Pre-merger) 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% 11

12 1 Year Early July: stock jumps on reports company is looking for buyer Late July: weak Q2 earnings - stock falls 12

13 LVLT Merger 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% 13

14 Financials of Combined Company 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 14

15 Positives of Merger Allows company to deliver the fastest, most reliable broadband network to customers Increases CTL s network by 200,000 miles of fiber 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 15

16 New Industry Overview 16

17 The Network 17

18 History of Acquisitions 18

19 Comps Analysis 1 - Centurylink Acquires Qwest 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 19

20 Comps Analysis 2 - Centurylink Acquires Savvis 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 20

21 Post Acquisitions (1 year after) Savvis Y/Y 7.6% revenue growth Q2 of 2012, CTL Operating Revenues up 5% Qwest Operation Synergy Expenses Million in synergy run rate (Savings), Spent 61 Million May 9th, 2012 meet both of their synergy goals 21

22 M&A at a Glance 22

23 Largest Completed Deals (2010 to date) 23

24 LVLT Inputs 24

25 LVLT Valuation 25

26 Higher Valuation = Lower Premium 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 Premium 22.4% 29% 26

27 What if this merger doesn t happen? 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 27

28 Industry Peers 28

29 3 Year - CTL 29

30 1 Year - CTL vs. VOX 30

31 CTL Inputs 31

32 CTL Valuation 32

33 Valuation of CTL + LVLT 33

34 The Debt 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 34

35 Interest Rate Risk 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. 35

36 Overview Strengths Strong enterprise business Adding international presence High dividend Opportunities New growth New offerings New products Greater platform Weaknesses Low growth A large number of competitors Amount of debt Threats Raising interest rates Merger not going through Increasing competition 36

37 Proposal Buy 782 of CTL at $25.49 for a total of $20,011 37

38 Portfolio 38

39 Questions? 39