CenturyLink Inc., the Louisiana-based fixed-line phone and Internet company, agreed to buy Savvis Inc. for $2.5 billion to add services that let business customers store and access data and applications online.
Savvis stockholders will receive $40 a share, consisting of $30 in cash and about $10 in CenturyLink shares, the companies said today in a statement. That’s 11 percent more than Savvis’s closing price yesterday. CenturyLink will also assume about $700 million of debt.
The purchase lets CenturyLink Chief Executive Officer Glen Post add so-called cloud-computing services as he seeks to offset declining home-phone demand and challenge larger rivals such as Verizon Communications Inc. Verizon agreed in January to buy Savvis competitor Terremark Worldwide Inc. for $1.4 billion.
“It’s a smart strategic move as it should help mitigate CenturyLink’s revenue decline,” said Chris Larsen, a Piper Jaffray & Co. analyst in New York, who has an “overweight” rating on CenturyLink shares. “Without this transaction, 2012 revenues would decline.”
Savvis rose $3.27, or 9.1 percent, to $39.29 in Nasdaq Stock Market trading at 4 p.m. New York time. The shares have gained 54 percent this year. Savvis CEO Jim Ousley said in February telecommunications companies were shopping for companies like his.
CenturyLink, based in Monroe, Louisiana, fell 18 cents to $40.14 in New York Stock Exchange composite trading.
Rising Cloud Demand
The buyers of more than 100 U.S. telecom-services providers over the past two years paid an average premium of 25 percent compared with the average price of 20 trading days before the deal’s announcement, according to Bloomberg data. CenturyLink agreed to pay a premium of 10 percent on that basis.
CenturyLink will pay 14 times Savvis’s earnings before interest, taxes, depreciation and amortization. The median ratio for nine buyers in comparable deals was 6.5 times over the past two years.
Savvis, based in Town & Country, Missouri, is set to boost revenue from its hosting business by more than 10 percent this year, Ousley said in February. Hosting accounted for almost three-quarters of Savvis’s $933 million in revenue last year. Today, the company said its first-quarter net loss shrank to $1.8 million, while sales rose 19 percent to $257 million.
Growth Through Takeovers
“It’s the right move at the right time,” Post said on a conference call. “Savvis can make a difference in our company.”
Savvis had considered other offers and has a responsibility to consider others that may yet come in, Ousley said in an interview. Savvis may have to pay CenturyLink $85 million under certain circumstances if Savvis terminates the current deal, according to a securities filing.
CenturyLink’s offer is at a favorable price, said David Silverman, managing director of Greenwich, Connecticut-based Blue Harbor Group LP, which holds about 2 million Savvis shares, or 3.5 percent. The firm began buying Savvis shares about a year ago for between $15 and $20 a share.
CenturyLink and Savvis have negotiated a breakup fee, payable if the transaction fails to go through, Post said. He declined to say what the fee was. CenturyLink said it will finance the cash portion of the deal with a $2 billion bridge loan.
CenturyLink plans to combine Savvis with its own hosting business, and appoint Ousley to run the unit. The companies said the deal will probably close in the second half.
Post said in an interview he expected “a minimal impact” on the combined companies’ workforce, declining to give details. The deal will increase CenturyLink’s workforce to about 50,000.
CenturyLink’s $400 million of 7.6 percent bonds due September 2039 decreased 3.01 cents to 102.5 cents on the dollar as of 1:37 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Acquisitions have helped CenturyLink almost triple revenue since 2008 even as the market for home phones declines amid rising mobile and digital voice service. In 2009, the company purchased Embarq Corp. for about $12 billion, and this month, it completed the purchase of Qwest Communications International Inc. for more than $20 billion.
“This transaction in our view certainly increases the risk of integration,” said Michael McCormack, an analyst at Nomura Securities International Inc. in New York, referring to the Savvis purchase. “Will this be a distraction from the integration of Qwest, which is the most important transaction?”
Including Qwest, Embarq and now Savvis, Post agreed to spend $38.7 billion on acquisitions over the past five years, according to Bloomberg data. In the five years before that, his purchases amounted to $2.28 billion.
In the Savvis deal, CenturyLink was advised by Barclays Capital and Bank Of America Corp., while Wachtell, Lipton, Rosen & Katz and Jones, Walker, Waechter, Poitevent, Carrere & Denegre LLP provided it with legal help. Savvis’s financial adviser was Morgan Stanley, and Wilson Sonsini Goodrich & Rosati gave it legal assistance.