TMRK Terremark Worldwide, Inc. (MM)

CenturyLink Inc. (CTL), now the third-largest landline operator in the U.S., plans to acquire an information technology (IT) services provider Savvis Inc. (SVVS) for $2.5 billion in a cash and stock combination valued at $40 per share.

Under the proposed agreement, CenturyLink will pay Savvis stockholders $30 per share in cash and $10 in CenturyLink’s shares. The transaction has been approved by the boards of both companies and is awaiting approval from antitrust regulators and Savvis shareholders. The transaction is expected to be completed in the second half of the year.

CenturyLink is bent on acquiring Savvis to meet the growing demand for cloud services. The proposed acquisition represents CenturyLink’s enthusiasm to enter the market for corporate IT services delivered over the Internet rather than an in-house IT department. CenturyLink is seeking to expand its advanced business in order to offset declining revenues from its traditional fixed line business.

The transaction will provide an edge over its competitor Verizon Communications Inc. (VZ) with greater scale and operational efficiency. Last month, Verizon acquired IT service company Terremark Worldwide Inc. (TMRK) for $1.4 billion.

The proposed deal is expected to improve CenturyLink's revenue, EBITDA and free cash flow. It is expected to be accretive to CenturyLink’s free cash flow in the initial year following the closure and will generate cost synergies of roughly $70 million. When combined, CenturyLink and Savvis will operate 48 data centers located in North America, Europe, and Asia; a healthy national 207,000 route-mile fiber network; and a 190,000-mile global access network.

Telecommunication carriers are rapidly entering the cloud computing business due to increased competition and changing consumer habits. This will help operators to differentiate their products and services and pave the way for strategic alliances between telecom and IT companies.

We believe the growth momentum for CenturyLink’s broadband Internet business is more than offset by losses in the fixed voice access lines. While the merger with Embarq, the Qwest acquisition completed earlier this month and the pending acquisition of Savvis may eventually yield a number of operational benefits and cost synergies, significant integration challenges may impede future operating performance.

In addition, competitive threats from cable TV operators, declining fixed access linesas well as a high debt level make us cautious on the stock.

We are currently maintaining our long-term Neutral recommendation on CenturyLink supported by the Zacks #3 Rank (Hold).

 
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