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CenturyLink (CTL) Inks Deal to Buy Level 3 Communications

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Yesterday, CenturyLink Inc. and Level 3 Communications Inc. entered into a definitive agreement through which the former will acquire the latter in a cash and stock transaction. Total deal size is approximately $34 billion including debt. The equity value of this deal is approximately $25 billion.

Per the agreement, Level 3 Communications shareholders will receive $26.50 per share in cash and a fixed exchange ratio of 1.4286 shares of CenturyLink for each Level 3 Communications share they own, which implies a purchase price of $66.50 per Level 3 Communications’ share. Upon the closing of the transaction, CenturyLink’s shareholders will own approximately 51% and Level 3 Communications’ shareholders will own approximately 49% of the combined entity.

CenturyLink expects the transaction to be accretive to free cash flow in the first full year following its closure of the deal and be significantly accretive on an annual run-rate basis thereafter. The combined entity is likely to generate $975 million of annual cash synergies. The deal is anticipated to be closed in the third quarter of 2017, subject to customary regulatory approvals.

Both CenturyLink and Level 3 Communications provide communications services like data, voice and video transmission for large enterprises. Notably, Level 3 Communications is the provider of one of the largest Internet backbone in the world. However, in recent years, both the companies were struggling to maintain their business momentum after facing severe competitive threats from large telecom operators such as Verizon Communications Inc. (VZ - Free Report) , AT&T Inc. (T - Free Report) and Comcast Corp. (CMCSA - Free Report) . Currently, both CenturyLink and Level 3 Communications carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

If the proposed merger finally materializes, it will increase CenturyLink's network by 200,000 route miles of fiber including 64,000 route miles in 350 metropolitan areas and 33,000 subsea route miles connecting multiple continents. CenturyLink's on-net buildings are expected to increase by nearly 75 percent to approximately 75,000, including 10,000 buildings in EMEA (Europe, the Middle East and Africa) and Latin America. Therefore, a merged CenturyLink and Level 3 Communications will become a formidable challenger to their large counterparts.

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