CenturyLink (CTL) is one of the three top telecommunications companies in the U.S., providing broadband, wireless, and managed services to consumers and businesses. The company provides entertainment services under its Prism and DTV brands. It serves national and international markets for managed services and cloud computing through its fiber optic network and data centers. CenturyLink's goal is to establish itself as the number one broadband provider in the U.S. In this article, I will focus on the strategies the company is using to achieve that goal.
In order to build out its core offerings of broadband services, managed services, and cloud computing, the company acquired strategic assets through a series of corporate acquisitions. CenturyLink acquired Savvis in April of 2011. It also completed its 2010 acquisition of Qwest in April of 2011. The company acquired Embarq in 2009.
CenturyLink's strategic moves in 2012 have all involved debt reorganization activities, including the streamlining of corporate structure, in order to reduce its total debt and improve operational efficiencies.
CenturyLink's announcement on March 5th outlines a tender offer of new debt to retire the debt related to Embarq's outstanding debt. The announcement states that an interest rate of 7.658% will be fixed on an average of a 40 year maturity from the settlement date of April 17, 2012.
The company will take a one time charge in the first quarter 2012 between $141 and $144 million for premiums paid to holders who tendered the notes and transaction costs of the offer. CenturyLink's wholly owned subsidiary, Embarq, tendered two series' of notes worth approximately $1.14 billion in principal in exchange for an offer of $1.30 billion, including accrued interest. This offer replaces the 8.375% notes from Embarq, which come due in 2016, along with the 6.738% notes which come due in 2013, of which there are $2 billion outstanding. The offer extends the maturity date, and reduces the average interest rate.
On March 22, 2012, the company announced it would revise the structure of its operating group to benefit its business and government customers, and to better support integrated solutions. The new Enterprise Markets Group will house Savvis and federal government customers. Large business, state and local government customers will be served by the existing Regional Markets Group. These changes allow the company to be more effective in servicing its clients in each customer group, and assists CenturyLink in leveraging strategic assets from its acquisitions of Embarq, Savvis and Qwest. In other words, it will be easier to reorganize debt in separate operating units.
CenturyLink has divested of some real estate assets. It recently sold the Qwest Plaza building in Seattle for $137 million. CenturyLink/Qwest has been selling off assets that are not central to the business strategy, which is to establishing itself as a premier provider of broadband services.
Shares currently trade around the $39 mark, between a 52-week range of $31.16 and $43.49. It has a price earnings multiple of 36:20, earnings per share of $1.07, and a dividend yield of 7.5%. CenturyLink has total cash of $128 million and total debt of $21.84 billion. The book value per share is $33.67. Its current ratio is 0:88, indicating that it may have some difficulty in meeting current liabilities as they come due. CenturyLink will announce first quarter 2012 earnings on May 9, 2012.
Sprint (S) currently trades around $2.90, between a 52-week range of $2.10 and $6.45. The company has negative per share earnings of ($0.97), and does not currently pay a dividend. Sprint's market capitalization stands at $8.60 billion. It has revenue of $33.68 billion. Sprint has total cash of $5.60 billion, and total debt of $20.27 billion. Its current ratio of 1:59 indicates its good ability to cover current liabilities as they come due. Its book value per share is $3.81. Of its 2.99 billion issued common shares, 85.80% are held by institutions, while 0.13% are held by insiders. The remaining 18.4% are held by retail investors. There were 61.96 million shares short as of March 15, 2012, up from 56.21 million in the prior month.
Sprint reported fourth quarter 2011 operating income of $842 million, while reporting $5.1 billion for the full year. Wireless service revenue increased by 7% over the full year of 2011, which was the largest recorded increase in the U.S. wireless industry. It also reported strong revenue growth, as cost management partially offset the impact of sales expenses associated with the launch of the new iPhone.
Sprint's size advantage allows it to reach a large number of users (55 million) through its mobile networks. Sprint's mobility footprint also provides the first mobile 4G network in the U.S. Sprint is the primary carrier for highly recognized pre-paid brands, such as Virgin and Boost Mobile. Entry, branding, and technology upgrade costs in the mobile market far exceed those of managed services and broadband.
Despite the company's highly visible and well utilized mobile networks, it has negative earnings and net income, indicating that its debt service obligations still outweigh its growth. Sprint's debt load has put many investors on the sidelines until the company reconciles the massive capital expenditures it has to make to remain competitive in the mobile space.
CenturyLink's biggest problem is also its debt situation. The recent tender offer to retire the debt related to Embarq's outstanding debt is a positive step in the direction of improving its ability to cover short term liabilities and shore up its current ratio. Fitch Ratings is of the opinion that CenturyLink's revenues will stabilize in 2013 and 2014, due to revenues from high speed data, managed business services, cloud computing, and growth in revenues from facilities based video. Fitch opines that there is some downside in macroeconomic risk, which could be mitigated by the revenue synergies from the Savvis acquisition.
Fitch also says in the same article that Quest should be on a path to reduce its debt by $1.5 to $2 billion by the end of 2012. The dividend is put in jeopardy by its debt position. Fitch Research also opines that the dividend will have to be cut by as much as 55% in order to properly reorganize and achieve its goals.
Pressures still exist in the landline business, which CenturyLink expects to continue. What the company loses in landline revenue, it will gain in managed services, cloud computing services, and broadband entertainment bundled services. CenturyLink must remain competitive in that space in order to retain existing customers and attract new ones.
The percentage of the float owned by institutions is 3.0%. With 0.21% owned by insiders, this leaves 96.89% of the shares held by retail investors. The float is 616.33 million, with the number of shares sold short around 7.40%, or 19.9 million short, as of March 15, 2012. A very broad retail base provides the perfect reason for investors to run for the hills when the dividend is cut. The short position will continue to increase, and institutional investors and value investors will wait for an entry point lower than the current share price.
The company has good value in its consumer assets, its Enterprise and Regional Business divisions, and its broadband entertainment assets. Debt will continue to plague the company until it makes the unpopular decision to cut the dividend to preserve capital and retire debt. While macroeconomic conditions always present unseen difficulties, CenturyLink is doing the right thing by simply executing on its strategy. If it gets a firm handle on its debt situation, and its strategic assets continue to perform well, shareholders will be greatly rewarded in the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
