news

CenturyLink Downgraded on Merger Integration Concerns

Goldman Sachs on Wednesday downgraded the stock of CenturyLink Inc. to a hold from a buy, partly citing risks as the nation’s third-largest landline telecommunications provider continues to integrate two companies that it acquired last year: Qwest Communications and Savvis.

In a research note, Goldman Sachs analysts lowered the 12-month price target on the stock to $38 from $44.

“We believe integration risks remain high as the company continues to fold Qwest and Savvis into its structure and more aggressively pursue enterprise and hosted solutions, areas in which CTL did not traditionally compete,” the analysts wrote.

A number of issues, including lowered revenue guidance four months after the Qwest acquisition, have illustrated CenturyLink’s challenges in rapidly growing through acquisitions, Goldman Sachs said. CenturyLink acquired Embarq Corp. in July 2009, Qwest in April 2011 and Savvis in July 2011.

Among some other challenges mentioned in the report, Goldman Sachs cited risks to EBITDA (earnings before interest, taxes, depreciation and amortization) due to rising pension costs and CenturyLink’s indication that it won’t buy back stock this year due to other financial obligations, including debt reduction, dividend payments and integration costs.

“Though still early, synergies from Qwest are tracking at a slower pace (of expected deal synergies) than the Embarq transaction, highlighting to us how lean Qwests operations were by the time the deal was consummated,” the analysts added, referring to the savings in costs that CenturyLink anticipated achieving through its acquisition of Qwest. “We anticipate that CTL will exit 2012 with an annualized synergy run rate of nearly $375mn, up from approximately $200mn in 2011 but representing only 65% of guided total synergies.”

Meantime, CenturyLink must incur substantial costs integrating Qwest, the Denver-based carrier with local operations in 14 states.

“The integration will incur approximately $650 million to $800 million of operating costs over three to five years and approximately $150 million to $200 million of one-time capital costs,” stated Zacks Investment Research, which upgraded CenturyLink’s stock to an outperform from a neutral in a research note Dec. 20. “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.”

CenturyLink’s acquisitions also have hurt its balance sheet: its debt has ballooned to $22.1 billion from $7.3 billion at the end of 2010, Zacks said.

Zacks, however, cited a number of developments that reflect potential upside for Monroe, La.-based CenturyLink, including its entry into the rapidly growing cloud computing business through the Savvis acquisition and measures to mitigate access line losses, including an agreement with Verizon Wireless in which CenturyLink has begun reselling the wireless giant’s products and services to small business customers.


Leave a comment

Your email address will not be published. Required fields are marked *

Polls

Is your business ready for the EU's GDPR to go into effect on May 25?

View Results

Loading ... Loading ...
The ID is: 84349