Business Context and Reporting Period
This Form 8-K, dated October 31, 2016, reports that CenturyLink, Inc. (now Lumen Technologies, Inc.) entered into a definitive Agreement and Plan of Merger with Level 3 Communications, Inc. The filing details the terms of the proposed combination, which involves a two-step merger process resulting in Level 3 becoming an indirect wholly-owned subsidiary of CenturyLink.
Key Financial Metrics and Transaction Terms
The filing does not provide historical revenue, profit, cash flow, or debt metrics for either company. The primary financial data relates to the transaction consideration and potential termination fees:
- Merger Consideration: Level 3 shareholders will receive $26.50 in cash and 1.4286 shares of CenturyLink common stock for each share of Level 3 common stock held.
- Termination Fees: Level 3 may be obligated to pay CenturyLink $737.5 million under certain termination scenarios. CenturyLink may be obligated to pay Level 3 $471.5 million under specific conditions.
- Expense Reimbursement: In the event of termination due to shareholder disapproval, parties agree to reimburse 50% of the other party's fees, capped at $20 million for CenturyLink and $75 million for Level 3.
Material Changes and Transaction Structure
The material change is the execution of the Merger Agreement. The transaction structure involves:
- Initial Merger: Merger Sub 1 merges with Level 3, with Level 3 surviving as a CenturyLink subsidiary.
- Subsequent Merger: Level 3 immediately merges into Merger Sub 2, which survives as a CenturyLink subsidiary.
- Tax Status: The combination is expected to qualify as a tax-free reorganization for U.S. federal income tax purposes.
- Equity Treatment: Restricted stock units granted prior to April 1, 2014, are exchanged for merger consideration. Units granted on or after that date are converted to CenturyLink RSUs with performance conditions deemed satisfied based on actual performance through the latest practicable date prior to closing.
- Failure to obtain required regulatory or shareholder approvals.
- Integration difficulties and potential failure to realize anticipated cost savings or revenue enhancements.
- Changes in the communications industry, including technology shifts and regulatory changes (e.g., net neutrality, intercarrier compensation).
- Adverse changes in access to credit markets or debt credit ratings.
- Network security breaches or service outages.
- Verify the final approval status of the merger by Level 3 and CenturyLink shareholders.
- Monitor the status of regulatory approvals, specifically from the Federal Communications Commission (FCC) and antitrust authorities.
- Review the upcoming joint proxy statement/prospectus for detailed financial projections and integration plans.
- Assess the impact of the stock-for-stock exchange ratio (1.4286 shares) on CenturyLink's diluted earnings per share.
- Confirm the retention of key personnel and the stability of the combined company's credit rating.
Guidance, Outlook, Risks, and Contingencies
Conditions to Closing: The transaction is subject to Level 3 and CenturyLink shareholder approval, regulatory approvals (including the FCC and antitrust review), and the effectiveness of a Form S-4 registration statement.
Timeline: The agreement must be consummated by October 31, 2017, extendable to January 31, 2018, if regulatory conditions are met.
Risks and Contingencies:
STT Crossing Agreement: STT Crossing Ltd, holding approximately 18% of Level 3 stock, has entered a Voting Agreement to support the merger and a Shareholder Rights Agreement granting it a board seat on CenturyLink's board for the first three annual meetings post-combination, provided it retains at least 85% of its post-merger stake.