One special situation to watch is CenturyLink's (LUMN 0.97%) upcoming merger with Level 3 Communications (LVLT). As I've previously written, the merger could transform the fortunes of both companies for the better, as both (especially CenturyLink) have been struggling lately. On top of that, activist investor Keith Meister of Corvex Management is involved. Back in May, Meister revealed that Corvex had a 5.5% stake in CenturyLink.

Meister and other CenturyLink investors had a rough August. First, regional telecom stocks sold off after struggling peer Windstream eliminated its dividend on Aug. 3. Then an analyst downgrade of fiber and tower REIT (real estate investment trust) Uniti Group took down regional telecoms again, CenturyLink and Level 3 included. More bad news came Aug. 18, when news reports hinted California regulators could delay the merger beyond the self-imposed deadline of Oct. 31, which is well beyond company guidance of a third-quarter close. Both CenturyLink and Level 3 fell yet again.

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Meister ups his stake

Despit the negativity, Meister is showing confidence the deal will close...eventually. A recent SEC filing revealed that Meister bought more shares on Aug. 3 (after Windstream's dividend cut), and then upped his bet again on Aug. 17, largely by purchasing call options on CenturyLink's stock. A call option gives the holder the right to buy a stock at a designated "strike price" on a specific future date. 

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Meister already owned options that expire on Oct. 20 with strike prices of $28 and $30. Apparently since California looks as though it's dragging its heels with the approval, Meister bought more call options at a strike price of $23 and an expiration on Jan. 19, 2018. That could mean either that Meister's confidence is increasing, or merely that he believes his older options will expire worthless. That makes sense, as shares would have to appreciate by 50% in just two months for them to get "in the money" -- or above the designated strike prices.

The merger is crucial

Accounting for the options, Meister has increased his stake in CenturyLink from 5.5% to 6.6%, which means his views on the eventual closing and improved prospects of the combined company remain intact. Prior to August, things had gone well for Meister, as CenturyLink agreed to his suggestion that Level 3 CEO Jeff Storey become the CEO of the combined company.

Meister believes the combined company will benefit from the two companies' complementary footprints, interconnection synergies, and Level 3's tax assets from years of operating losses. Those cost savings should protect the dividend while giving Storey time to improve operations, as he did during his tenure at Level 3. The drop in CenturyLink's stock price has pushed its dividend yield to near 11%.

All of those things should still happen; if not, it would be bad news for both companies. Level 3 reported flat revenue in its recent earnings report. CenturyLink, meanwhile, continued its string of earnings misses. Notably, adjusted earnings per share fell to $0.46, well below the quarterly payout of $0.54, putting its dividend in question. Both companies are under increased competitive pressure from cable companies, national telecoms, and regional carriers alike. Should the merger be blocked, both companies would be left in a precarious position.