Please ensure Javascript is enabled for purposes of website accessibility

Why CenturyLink Inc Stock Just Soared 18%, and Level 3 Communications Is Up 13%

By Rich Smith – Oct 27, 2016 at 12:59PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There's a merger in the offing. Maybe.

CenturyLink and Level 3 Communications may have an urge to merge. Image source: Getty Images.

What happened

Shares of communications services companies CenturyLink (LUMN -2.43%) and Level 3 Communications (LVLT) both soared in Thursday trading -- and we're not just picking those two names at random out of a grab bag of big gainers for the day. CenturyLink shares closed up 9.7% for the day, and Level 3 up 10.6%, after retracing some of their gains earlier in the day. These two particular companies, you see, are linked -- or rather, they may be about to become so.

According to multiple media reports, CenturyLink and Level 3 are in "advanced talks" to merge their businesses in a deal worth in excess of $50 billion, including both the market capitalizations of both companies and the value of their respective debts. Neither company is talking about the speculated merger, but confirmation of the deal (or its refutation) is expected as early as next week.

So what

This deal, if it comes to pass, will be an example of vertical integration in the communications space. Fiber network operator Level 3 is well known as an upstream provider of "enterprise level" communications services to businesses. Downstream, CenturyLink links up individual customers to the global internet through broadband and phone-service offerings. That being the case, investors should expect to be regaled with promises from corporate management of significant cost-saving "synergies" from such a merger in an effort to garner support for the deal.

Now what

With shareholders in each stock having already netted 10% profits on the mere rumor that a deal is in the works, they may not need much more convincing to OK the merger. After all, if the merger fails to materialize, those gains would likely evaporate.

As for investors who weren't lucky enough to own the stocks prior to the news coming out, well, CenturyLink shares currently sell for just 17.4 times earnings -- about a 30% discount to the 25.1 times earnings valuation at Level 3. If this turns out to be a "merger of equals," therefore, then it's more likely there are more gains in store for owners of CenturyLink stock than for shareholders in Level 3.

On the other hand, according to analysts polled on Yahoo! Finance, both of these companies are currently expected to experience declining earnings over the next five years. That being the case, it's hard to argue that either stock was any sort of a bargain prior to their respective run-ups in price -- and even less so afterwards.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 324 out of more than 75,000 rated members.

The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.