CenturyLink (CTL) recently announced further measures to accelerate its integration of 2011 acquisitions Qwest and Savvis. The anticipation of non-cash charges is likely to impact earnings reports over the next few quarters. With that said, investors should still focus on the company's cash flow. The stock price has fundamental support as long as cash flow sustains the high dividend yield. As CenturyLink's EBITDA is under pressure in 2012, the company is eager to realize cost savings by meeting its integration goals, as well as expand service offerings.
Particular attention is warranted to the company's debt leverage. CenturyLink must avoid a dividend cut while meeting debt service obligations. Any macroeconomic weakness that re-accelerates losses of fixed wireline accounts could create complications for the company. Bond market acceptance of new notes is an indicator of confidence in the company's cash flow. This article reviews recent borrowing plus expansion moves by CenturyLink and its subsidiaries.
New Debt Funding
Subsidiary operation Embarq recently completed a previously announced debt tender offer for two series of notes. A total of $815 billion was tendered for notes due in 2016 bearing 7.082% interest. That comprises 40.8% of the outstanding notes purchased. Another $328 million was tendered for 62.1% of the outstanding notes due in 2013 and bearing 6.738% interest. On March 30, 2012, expiration date, Embarq accepted $1.3 billion, which includes accrued interest on the $1.14 billion principal amount of the notes.
A few days later, CenturyLink subsidiary Qwest released progress on the previously announced debt tender offer for two series of notes. In addition, Qwest amended the offer by increasing the maximum aggregate purchase price from $500 million to $1.075 billion. Approximately $878.2 million has been tendered in the offering, which is set to close on April 17, 2012.
The consolidated balance sheet for CenturyLink at the fiscal year ended December 31, 2011, disclosed $7.316 billion of long-term debt. The free cash flow for the year of $234 million minimally supports this debt load.
Real Estate Transactions
CenturyLink has additional avenues for raising cash. One such example was in early April as the company announced the sale of the downtown Seattle tower that Qwest built 36 years ago. A New York real estate investment firm paid $137 million for the 32-story building. CenturyLink will continue occupying 260,000 square feet as a tenant in the building.
In a move that signifies expansion by CenturyLink of its Savvis unit, the company recently reported that it has a 165,000 square foot property under contract in a joint venture with Digital Realty Trust (DLR). The Hong Kong building marks a further advance into Asian markets by CenturyLink.
Savvis will utilize the location for a 5.76-megawatt capacity co-location and managed cloud services facility. This is aligned with the Hong Kong government's Digital 21 Strategy to turn the area into a hub for cloud services. The building acquisition is expected to close in the second quarter of 2012.
In March 2012, CenturyLink announced the availability of Symphony Dedicated private cloud solution and managed services through the existing Savvis data center in Hong Kong. This operation serves as a gateway for additional cloud infrastructure and hosted IT solutions for enterprises in the Asian region.
This follows a recent announcement by Savvis to build a second data center in Singapore. In February 2012, Savvis launched its Symphony Open public cloud along with Symphony Dedicated private cloud services provided by a data center located in Tokyo.
Symphony Dedicated delivers a wide range of flexible cloud computing solutions that enhance scalability, security, and migration for businesses. The cloud services are offered individually or as hybrid solutions that combine cloud computing with managed hosting, colocation, and network services.
Even with cost synergies from the integration of Qwest, CenturyLink is likely to experience the same EBITDA margin in 2012 as it realized in 2011. I expect few surprises in the effort due to the proven track record of company management at attaining billing and network integrations. EBITDA in 2011 was 42.5% of revenue. This compares with 47% at Frontier (FTR) and 44% at Windstream (WIN) - both much smaller enterprises than CenturyLink, but similar in their serving primarily rural markets.
Headwinds are still compressing the number of voice wireline subscribers. This exerts downward pressure on revenue. Gains in enterprise solutions by Savvis require additional time to outweigh the wireline losses. The same gradual process is true for CenturyLink additions of data service subscribers. A wildcard is the potential for successful market penetration of television services over IP. This can increase sales of data services. However, CenturyLink will incur higher costs to deploy IP television in new markets.
CenturyLink stock is attractive for patient investors. But developments regarding integration synergies, as well as expansion of enterprise and data services, demand careful scrutiny.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.