On May 2, CenturyLink (CTL 0.99%) completed the sale of its data center assets to an investment group that included Medina Capital Advisors and Longview Asset Management, in a newly formed company called Cyxtera.
The portfolio includes 57 data centers, which CenturyLink will lease from the new company. Moreover, CenturyLink will have a 10% ownership position in Cyxtera, which will allow the company to both lease these data centers at fair rates and allow it to participate in the upside to Cyxtera. CenturyLink will receive over $1.8 billion in cash.
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Declining results need help
Cash and upside are two things CenturyLink desperately needs. The company's legacy business is declining at an alarming rate at the same time the company is about to swallow a massive acquisition in Level 3 Communications (LVLT +0.00%).
In the recently reported quarter, CenturyLink's revenue fell 4.3% year over year, and operating income fell an even worse 8.2%, as the downside of a fixed-cost business reared its head in the way of negative operating leverage. Adjusted earnings came in at $0.52, missing analysts' already low estimate of $0.53.
At $0.54 per share, the company's quarterly dividend is now more than earnings, a worrisome situation. The company did note that its strategic enterprise revenues grew 4% year over year, but that wasn't enough to offset a nasty 9.3% decline in its legacy revenues segment.
The company also guided to what could be even lower adjusted earnings per share of $0.46-$0.52 in the upcoming second quarter.
The deal looks good but won't make much difference
The data center deal makes sense from a strategic point of view, as CenturyLink accomplished a couple of things, but it doesn't look like it will have a huge impact.
For one thing, it is taking in roughly $1.75 billion in after-tax cash proceeds for the Level 3 deal, but that's peanuts in comparison with the $34 billion it's shelling out for the company. Moreover, the company will now have to make lease payments to Cystera of roughly $15 million per quarter.
For another thing, the company's remaining 10% stake in the data centers ensures it will have access to them for its co-location services business. If Cyxtera is wildly successful at growing revenue, CenturyLink will get some of that upside as well, though it's likely to be a drop in the bucket against CenturyLink's $16 billion-plus in revenue.
Summing it up
CenturyLink is doing the best it can to invest in growth initiatives to weather the rapid decline in its legacy landline business. The company is doing much better in this regard than Frontier Communications (FTR +0.00%), whose stock plummeted recently after it cut its dividend.
CenturyLink's sale of the data center business is a savvy move, but it's really just tinkering around the edges. As Cowen and Company analyst Greg Williams wrote after earnings, the only thing that can save CenturyLink is a successful closing of its Level 3 acquisition. Level 3 in early May reported flat revenue, which is much more than CenturyLink can say, and slightly improved network margin, and the two companies look to benefit from both cost and revenue synergies, as well as Level 3's tax credits. Without that, CenturyLink would be in a tough spot, even with its data center sale and leaseback.
