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How Much Can CenturyLink Change with Level 3 in Its Portfolio?

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CenturyLink assumes debt in Level 3 takeover

CenturyLink (CTL) is acquiring Level 3 (LVLT) for $34 billion in a cash and stock transaction that includes the assumption of debt. What impact could Level 3 have on CenturyLink’s performance in the coming years?

A look at its 3Q16 performance shows that CenturyLink failed to impress in the quarter. Its revenue of $4.4 billion fell nearly 4% year-over-year (or YoY), barely meeting the consensus estimate. The downbeat top line figure failed to hold CenturyLink’s bottom line as the company posted EPS (earnings per share) of $0.56, a fall compared to its EPS of $0.70 a year earlier. However, its EPS in 3Q16 were better than analysts’ consensus estimate of $0.55.

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Immediate boost to the top line

The chart above shows CenturyLink’s revenue in the last five quarters. The company’s acquisition of Level 3 should give an immediate boost to its top line. The company generated revenue of $2.0 billion in 3Q16, slighting missing the consensus estimate that called for revenue of $2.1 billion. Level 3’s EPS in its latest quarter came in at $0.40.

The acquisition is expected to further help the combined company pare down ~$1 billion in expenses as merger partners share resources and trim overhead costs.

Weathering the competition storm

The combined company is also likely to be more resilient to competition. While Level 3 boasts one of the world’s largest Internet backbones, CenturyLink has been upgrading its network infrastructure to compete with AT&T (T) and Verizon (VZ). In efforts to bolster its infrastructure, CenturyLink acquired landline assets from Sprint (S) for $6 billion.

Reduced tax bill

Because Level 3 has accumulated ~$10 billion in operating losses, its acquisition is expected to lower CenturyLink’s tax burden.

CenturyLink is expecting its 4Q16 EPS to be in the range of $0.55–$0.59. Revenue for the quarter is expected to be in the range of $4.28–$4.34 billion. Analysts’ consensus estimate calls for 4Q16 EPS of $0.64 and revenue of $4.38 billion.

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