Please ensure Javascript is enabled for purposes of website accessibility

CenturyLink Has a "Friendly" Activist: What It Means for Shareholders

By Billy Duberstein - May 23, 2017 at 3:13PM

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

The beaten-down telecom giant got a vote of confidence last week from activist investor Keith Meister. Here's his take.

Suffering shareholders of the telecoms company CenturyLink (LUMN 0.89%) got a boost on May 8 when activist investor Keith Meister revealed a 5.5% stake in the company, calling the shares undervalued by at least 40% and offering some "friendly" advice on management succession as the company merges with Level 3 Communications (LVLT).

As both I and fellow Fool Steve Symington have written before, CenturyLink's merger with Level 3 is a smart idea. The merger could turn CenturyLink from a struggling business -- that may have to cut its 9% dividend -- into a thriving one with plenty of dividend coverage and growth prospects. The key, though, is that the merger actually goes through, and that integration is successful. Meister shares this view, with a few other insights as well.

Start Tom Brady

Keith Meister is an activist and is known for taking on management teams. His take on CenturyLink is not the typical activist move of fixing a bad business. Rather, Meister merely suggests that Level 3's CEO, Jeff Storey, remain an executive to help oversee the integration. The succession plan as of now is for Story to join the board of the combined companies, but not in an executive role. Meister doesn't think CenturyLink CEO Glenn Post is a bad executive. Rather, he wishes to see both in hands-on roles at the combined company.

man holding dollar bills in front of his face like deck of cards

Image source: Getty Images.

This is because Storey has had a great track record at Level 3. Meister notes that since Story became CEO in 2013, Level 3 stock has risen 175%, beating the S&P 500 by a whopping 125%. "If you're the New England Patriots," Meister said, "you are going to start Tom Brady."

I hope Meister is aware that Storey may be taking a step back due to a heart condition that sidelined him in February of 2016; however, assuming Storey's health is OK, I'd agree with Meister. Level 3's recent record has been much better than CenturyLink's.

Why Meister believes it's mispriced

Meister has a few theories as to why the stock is mispriced. Mostly, CenturyLink's recent earnings were bad, showing an increased deterioration of its legacy businesses, even as its new businesses such as high-bandwidth enterprise services showed growth. Mr. Market, Meister contends, does not have the imagination to picture how much better the merged company will be. Since the deal announcement, CenturyLink's stock is down 10%-25% from where it was prior, despite the merger making the stock a better bet. That doesn't make much sense to Meister.

Moreover, Meister believes people are mistakenly comparing CenturyLink to Frontier Communications (FTR), which just cut its dividend 62%, and which some investors believe is going bankrupt.

However, Meister notes that Frontier is regional, which puts it at a scale disadvantage to CenturyLink and other competitors. Moreover, it is dealing with a poor integration of Verizon's wireline businesses in California, Texas, and Florida. Finally, the company only has 42% of its customers as Enterprise, which Meister believes are much "stickier" customers than consumers. Post-merger, CenturyLink and Level 3 will have 76% enterprise exposure, which Meister believes is a much higher-quality earnings stream.

Meister knows telecom

Meister has had a good history with telecom stock picks. His firm, Corvex Capital, had success with telecom investments in ABVT, which was later acquired by Zayo (ZAYO), and TW Telecom, which was acquired by Level 3 back in 2014. Meister now believes the Level 3 and CenturyLink merger will yield another win for his fund.

Given Meister's seal of approval, as well as Steve's and my own optimism regarding the deal, I think he may be onto something. The trick, of course, is obviously for the deal to go through, and then for the integration to go well. Those are always risks, especially with a merger of two $30 billion companies that will carry significant debt post-merger.

Bottom line: CenturyLink's stock took a hit after earnings, but a big hedge fund manager shining the light on the potential opportunities of its merger with Level 3 is giving shareholders hope for better times ahead. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Level 3 Communications, Inc. Stock Quote
Level 3 Communications, Inc.
Lumen Technologies Stock Quote
Lumen Technologies
$11.37 (0.89%) $0.10
Frontier Communications Corporation Stock Quote
Frontier Communications Corporation
Zayo Group Holdings, Inc. Stock Quote
Zayo Group Holdings, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

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