Notable Mergers and Acquisitions 10/31: (CTL)/(LVLT) (GE)/(BHI) (HFC)/(SU) (STZ)

October 31, 2016 9:59 AM EDT

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*** CenturyLink (NYSE: CTL) and Level 3 Communications, Inc. (NYSE: LVLT) announced that their Boards of Directors have unanimously approved a definitive merger agreement under which CenturyLink will acquire Level 3 in a cash and stock transaction valued at approximately $34 billion, including the assumption of debt. Under terms of the agreement, Level 3 shareholders will receive $26.50 per share in cash and a fixed exchange ratio of 1.4286 shares of CenturyLink stock for each Level 3 share they own, which implies a purchase price of $66.50 per Level 3 share (based on a CenturyLink $28.00 per share reference price) and a premium of approximately 42 percent based on Level 3's unaffected closing share price of $46.92 on October 26, 2016, the last trading day prior to market speculation about a potential transaction. Upon the closing of the transaction, CenturyLink shareholders will own approximately 51 percent and Level 3 shareholders will own approximately 49 percent of the combined company.

The combined company will have the ability to offer CenturyLink's larger enterprise customer base the benefits of Level 3's global footprint with a combined presence in more than 60 countries. In addition, the combined company will be positioned to further invest in the reach and speeds of its broadband infrastructure for small businesses and consumers.

"The digital economy relies on broadband connectivity, and together with Level 3 we will have one of the most robust fiber network and high-speed data services companies in the world," said Glen Post, CenturyLink Chief Executive Officer and President. "This transaction furthers our commitment to providing our customers with the network to improve their lives and strengthen their businesses. It is this focus on providing fiber connectivity that will continue to distinguish CenturyLink from our competitors. CenturyLink shareholders will benefit from the significant synergies and financial flexibility provided by the combined company's revenue growth and strong cash flow. For employees, this combination will bring together two highly customer-focused organizations and provide employees growth and advancement opportunities the companies could not offer separately."

"This is a compelling transaction for our customers, shareholders and employees," said Jeff Storey, President and Chief Executive Officer of Level 3. "In addition to the substantial value delivered to shareholders, the combined company will be uniquely positioned to meet the evolving and global needs of enterprise customers."

Strategic and Financial Benefits

  • Highly Complementary Businesses with Expanded Fiber Networks: This transaction increases CenturyLink's network by 200,000 route miles of fiber, which includes 64,000 route miles in 350 metropolitan areas and 33,000 subsea route miles connecting multiple continents. Accounting for those served by both companies, CenturyLink's on-net buildings are expected to increase by nearly 75 percent to approximately 75,000, including 10,000 buildings in EMEA and Latin America. Overall, the complementary domestic and international networks will provide cost efficiencies by focusing capital investment on increasing capacity and extending the reach of the combined company's high-bandwidth fiber network.
  • Enhanced Competitive Offerings in Business Network Services: The combined company will have significantly improved network capabilities, creating a world-class enterprise player with approximately $19 billion in pro forma business revenue and $13 billion in business strategic revenue, for the trailing twelve months ended June 30, 2016. Together, CenturyLink's and Level 3's revenue will be 76 percent derived from business customers, and 65 percent of the combined company's core revenue will be from strategic services. Given the complementary nature of the portfolios, the combined company will offer an even broader range of services and solutions to meet customers' demand for more bandwidth and new applications in an increasingly complex operating environment.
  • Enhanced Broadband Infrastructure: This transaction will provide the combined company with increased opportunity to invest in its broadband infrastructure and enhance broadband speed for small businesses and consumers.
  • Strong Financial Profile: The combined company is expected to have improved adjusted EBITDA margins, revenue growth and pro forma net leverage of less than 3.7x at close, including run-rate synergies. The combined company will benefit from Level 3's nearly $10 billion of net operating losses ("NOLs"). These NOLs will substantially reduce the combined company's net cash tax expense over the next several years, positioning it to generate substantial free cash flow.
  • Improved Dividend Coverage: The improved free cash flow will enhance the combined company's financial flexibility and significantly lower its payout ratio. CenturyLink expects to maintain its annual dividend of $2.16 per share.
  • Significantly Accretive to Free Cash Flow with Multiple Opportunities for Growth: CenturyLink expects the transaction to be accretive to free cash flow in the first full year following the close of the transaction and significantly accretive on an annual run-rate basis thereafter. Furthermore, the transaction will be accretive to CenturyLink's existing growth profile with additional upside opportunities, including the ability to deploy CenturyLink's and Level 3's product portfolio across the combined customer bases. With increased network scale, and dense local metro areas and global reach, the combined company will be positioned to further expand internationally.
  • Substantial Run-Rate Synergies: Both companies have a proven ability to integrate and meet or exceed synergy targets. The increased scale afforded by the combined company is expected to generate $975 million of annual run-rate cash synergies, primarily from the elimination of duplicative functions, systems consolidation, and increased operational and capital efficiencies.

Management, Board and Location

After the close of the transaction, Glen Post will continue to serve as Chief Executive Officer and President and Sunit Patel, Executive Vice President and Chief Financial Officer of Level 3, will serve as Chief Financial Officer of the combined company.

The Chairman of CenturyLink's Board at the time of the closing of the transaction will continue to serve as Chairman of the combined company. CenturyLink has agreed to appoint four Level 3 Board members at closing, one of whom will be a representative of STT Crossing (a wholly owned subsidiary of ST Telemedia).

The combined company will be headquartered in Monroe, Louisiana and will maintain a significant presence in Colorado and the Denver metropolitan area.

Financing and Approvals

CenturyLink intends to finance the cash portion of the transaction and pay related fees and expenses through a combination of cash on hand at CenturyLink and Level 3, and approximately $7 billion of additional indebtedness. In connection therewith, CenturyLink has received financing commitments from BofA Merrill Lynch and Morgan Stanley & Co. LLC totaling approximately $10.2 billion for new secured debt facilities, comprised of a new $2 billion secured revolving credit facility and approximately $8.2 billion of other secured debt facilities, including the refinancing of indebtedness expected to mature prior to closing of the transaction. All existing indebtedness of Level 3 is expected to remain in place at Level 3 and Level 3 will not incur any incremental indebtedness or guarantee any indebtedness of CenturyLink to finance the transaction.

The companies anticipate closing the transaction by the end of third quarter 2017. The transaction is subject to regulatory approvals, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, review by the U.S. Federal Communications Commission, certain state regulatory approvals and other customary closing conditions. The transaction is also subject to the approval of CenturyLink and Level 3 shareholders.

CenturyLink has entered into a voting agreement with STT Crossing (a wholly owned subsidiary of ST Telemedia), holder of approximately 18 percent of Level 3's outstanding common stock, pursuant to which it will vote its Level 3 shares in favor of the transaction.

CenturyLink and Level 3 Third Quarter 2016 Earnings Results

In separate press releases issued today, CenturyLink and Level 3 announced earnings results for the third quarter 2016. In light of today's transaction and third quarter earnings announcements, CenturyLink and Level 3 have both cancelled their previously announced calls for Wednesday, November 2, 2016 and Thursday, November 3, 2016, respectively. A joint presentation will be available at www.centurylink.com and www.level3.com.

Advisors

BofA Merrill Lynch and Morgan Stanley & Co. LLC acted as CenturyLink's financial advisors, and Evercore provided a fairness opinion. Wachtell, Lipton, Rosen & Katz and Jones Walker are acting as CenturyLink's legal advisors. Citigroup acted as financial advisor to Level 3, and Lazard provided a fairness opinion. Willkie Farr & Gallagher LLP acted as legal advisor to Level 3. Latham & Watkins acted as legal advisor and Credit Suisse acted as financial advisor to ST Telemedia.

*** GE (NYSE: GE) and Baker Hughes (NYSE: BHI) announced that the companies have entered into an agreement to combine GE’s oil and gas business and Baker Hughes to create a world-leading oilfield technology provider with a unique mix of service and equipment capabilities. The “New” Baker Hughes will be a leading equipment, technology and services provider in the oil and gas industry with $32 billion of combined revenue1 and operations in more than 120 countries. By drawing from GE technology expertise and Baker Hughes capabilities in oilfield services, the new company will provide best-in-class physical and digital technology solutions for customer productivity.

Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, at the closing of the transaction Baker Hughes shareholders will receive a special one-time cash dividend of $17.50 per share and 37.5% of the new company. GE will own 62.5% of the company. The transaction is expected to close in mid 2017.

“This transaction creates an industry leader, one that is ideally positioned to grow in any market. Oil & gas customers demand more productive solutions. This can only be achieved through technical innovation and service execution, the hallmarks of GE and Baker Hughes,” said Jeff Immelt, Chairman and Chief Executive Officer of GE. “As we built the GE Oil & Gas business, I have always been impressed by the respect our customers have for Baker Hughes. GE Oil & Gas is a key GE business, one that fully leverages the GE Store. As we go forward, this transaction accelerates our capability to extend the digital framework to the oil and gas industry. An oilfield service platform is essential to deliver digitally enabled offerings to our customers. We expect Predix to become an industry standard and synonymous with improved customer outcomes. GE investors will benefit through ownership of a stronger business with substantial synergies and an improved competitive position. The transaction is expected to add approximately $.04 to GE EPS in 2018, $.08 by 2020.”

Martin Craighead, Chairman and Chief Executive Officer at Baker Hughes said, “This compelling combination brings together best-in-class oilfield equipment manufacturing and services, and digital technology offerings for the benefit of all customers and stakeholders. The combination of our complementary assets will create a platform capable of seamless integration while we enhance our ability to deliver optimized and integrated solutions and increase touch points with our customers. In addition, Baker Hughes shareholders will receive a special one-time cash dividend of $17.50 per share and benefit from the upside of a stronger, larger business. With employees of Baker Hughes and GE Oil & Gas coming together, the new company will be an industry leader, well-positioned to compete in the oil and gas industry while pushing the boundaries of innovation for our customers.”

Lorenzo Simonelli, who is currently president and CEO of GE Oil & Gas said, “This transformative transaction will create a powerful force in the oil and gas market as we continue to drive long-term value for our customers and shareholders. This transaction is also exciting for employees of both companies. GE Oil & Gas and Baker Hughes are an exceptional cultural fit, sharing a commitment to exceeding customer expectations. Both companies’ employees will benefit significantly from being part of a larger, stronger company that is positioned for long-term growth. We look forward to combining the digital solutions and technology from the GE Store with the domain expertise of Baker Hughes and its culture of innovation in the oilfield services sector.”

Compelling Strategic and Financial Benefits of the Transaction

  • Complementary assets and integrated offerings will provide differentiated services for combined company’s customers. The company will combine the digital solutions, manufacturing expertise and technology from the GE Store and the outstanding track record of success Baker Hughes has in the oilfield services sector. With combined revenue of over $32 billion1 the product portfolio of GE Oil & Gas and Baker Hughes in drilling, completions, production and midstream / downstream equipment and services will create the second largest player in the oilfield equipment and services industry. Customers should expect sustainable innovation and integration that will deliver valuable outcomes. As one company, we will have operations in more than 120 countries. Both companies have invested even in the downturn and have strong, complementary competitive scope across the industry. From GE’s fullstream oil and gas manufacturing and technology solutions spanning across subsea & drilling, rotating equipment, imaging and sensing to the Baker Hughes portfolio in Drilling & Evaluation and Completion & Production, the combined company will be moving beyond oilfield services and into oil and gas productivity solutions.
  • The combination produces substantial synergies through combined efficiency and growth. The companies expect to generate total runrate synergies of $1.6 billion by 2020, which has a net present value of $14 billion. While this is primarily driven by cost out, we believe that the new company is positioned for growth as the industry rebounds.
  • Combination positioned to create value for Baker Hughes shareholders. The diversified portfolio can deliver through the oil and gas cycle. There is a large pool of synergies that will improve operating margins and drive organic growth. The “New” Baker Hughes has a strong balance sheet.
  • Combination positioned to create value for GE shareholders. The transaction is expected to be accretive to GE’s earnings per share by $.04 by 2018 and $.08 by 2020. This is another step in creating the premium digital industrial company.
  • The “New” Baker Hughes is expected to be the partner and employer of choice for the industry. Combination is an exceptional cultural fit. Both companies’ employees will benefit significantly from being part of a larger, more diversified company.

1 Based on 2015 combined revenue

Financial Structure

The transaction will be executed using a partnership structure, pursuant to which GE Oil & Gas and Baker Hughes will each contribute their operating assets to a newly formed partnership. GE will have a 62.5% interest in this partnership and existing Baker Hughes shareholders will have a 37.5% interest through a newly NYSE listed corporation. Baker Hughes shareholders will also receive a special one-time cash dividend of $17.50 per share at closing. The $7.4 billion contributed by GE to the new partnership will be used to fund the cash dividend to existing Baker Hughes shareholders.

Headquarters, Management and Board of Directors

The “New” Baker Hughes will have dual headquarters in Houston, Texas and London, UK.

Jeff Immelt, Chairman and CEO of GE will serve as Chairman of the Board of Directors and Lorenzo Simonelli, president and CEO of GE Oil & Gas will serve as President and Chief Executive Officer. Martin Craighead, Baker Hughes Chairman and CEO, will serve as Vice Chairman of the Board. The remainder of the executive leadership team will be a combination of existing leaders from both GE and Baker Hughes.

Upon closing, the “New” Baker Hughes board will consist of nine directors: five of whom, including Chairman Jeff Immelt will be appointed by GE and four, including Vice Chairman Martin Craighead will be appointed by Baker Hughes.

Path to Completion

The transaction is subject to approval by Baker Hughes shareholders, regulatory approvals, and other customary closing conditions.

GE and Baker Hughes are committed to working constructively with the relevant government regulators to achieve the necessary approvals.

Advisors

Centerview Partners is serving as financial advisor to GE on the transaction. Morgan Stanley is also acting as financial advisor. Shearman & Sterling is acting as legal advisor to GE. Goldman Sachs & Co. is serving as financial advisor to Baker Hughes. Davis Polk is acting as legal advisor to Baker Hughes.

*** HollyFrontier Corporation (NYSE: HFC) announced it has entered into a definitive agreement to acquire Suncor Energy’s Petro-Canada Lubricants business for CAD $1.125 billion (or approximately $845 million based on the exchange rate at time of signing), including working capital with an estimated value of CAD $342 million (or approximately $257 million based on the exchange rate at the time of signing). HollyFrontier expects to fund the transaction with a combination of debt and cash on hand, and anticipates the acquisition will be immediately accretive to the Company’s earnings per share and cash flow.

The Petro-Canada Lubricants plant, located in Mississauga, Ontario is the largest producer of base oils in Canada with 15,600 barrels per day of lubricant production capacity, and is the only North American producer of high margin Group III base oils. The facility is downstream integrated from base oils to finished lubricants and produces a broad spectrum of specialty lubricants and white oils which are distributed to end customers worldwide. The Petro-Canada Lubricants business will bring HollyFrontier industry leading product innovation and R&D capabilities, a global sales and distribution network and strong brand portfolio recognized globally. With this transaction, HollyFrontier also acquires a perpetual exclusive license to use the Petro-Canada trademark in association with Lubricants.

With the addition of the Petro-Canada Lubricants business, HollyFrontier will become the fourth largest lubricants producer in North America with a capacity of 28,000 barrels per day, or approximately 10% of North American production. Petro-Canada Lubricants has generated approximately $150 million of EBITDA over the 12 month period ended June, 2016.

George Damiris, President and CEO commented, “This transformative acquisition will diversify HollyFrontier with the addition of a differentiated high margin business with more stable cash flows. Petro-Canada Lubricants is a great business, which combined with our existing Tulsa Lubricants business creates scale and will create a strong platform for growth. We look forward to realizing the operational and financial benefits of this combination to further strengthen our company and drive continued value creation for HollyFrontier. We believe that the transaction will be of benefit to our stockholders, our current and new employees and Canada, especially as we expand the domestic and international reach of PCLI.”

The transaction is subject to regulatory approval and customary closing conditions and is expected to close in the first quarter of 2017.

HollyFrontier was represented by Morgan Lewis & Bockius LLP and Borden Ladner Gervais LLP on this transaction. Goldman, Sachs & Co. acted as exclusive financial advisor to HollyFrontier on this transaction.

*** Constellation Brands (NYSE: STZ) announced that it will submit to the U.S. Department of Justice a proposal to acquire a brewery operation from Grupo Modelo, a subsidiary of Anheuser-Busch InBev SA/NV for $600 million. The brewery, located in Obregon, Mexico, is expected to have four million hectoliters of production capacity with minimal investment and optimization by Constellation after closing. This transaction is subject to customary closing adjustments and U.S. Department of Justice and Mexican regulatory approvals. The acquisition of the Obregon brewery allows Constellation to immediately obtain functioning brewery capacity to support its fast-growing, high-end Mexican beer portfolio and provides flexibility for future innovation initiatives. It also enables the company to become fully independent from the interim supply agreement with Grupo Modelo. As a result, Constellation will phase the buildout of 10 million hectoliters at Mexicali, with the first 5 million hectoliters of production capacity expected to become operational by December 2019, and subsequent capacity planned to align with future growth.

"We believe this is the right strategy to provide near-term capacity and greater flexibility to support our growth and innovation plans, while allowing for the buildout of our Mexicali brewery over an extended time period," said Rob Sands, president and chief executive officer, Constellation Brands. "We look forward to welcoming Obregon`s talented employees to our Constellation family and working together to continue to capture the ongoing growth opportunities we see in the high-end segment of the U.S. beer market."

The Obregon brewery is located on Mexico`s west coast in the state of Sonora, and will help service Constellation`s largest beer markets in the western U.S. The majority of Obregon`s production is currently satisfying the interim supply agreement today, so it is expected to be a smooth transition during the continued expansion of the Nava brewery and the buildout of the Mexicali brewery.

"The magnitude of our long-term investments in Mexico largely remain the same. The revisions to our operating plans essentially represent an initial shift in spend to Obregon from Mexicali. This will result in an increase in our free cash flow estimate for fiscal 2017 to a range of $575 - $675 million," said David Klein, executive vice president and chief financial officer, Constellation Brands. "As originally outlined, Mexicali is scalable to 20 million hectoliters to support the future growth of our beer business, which continues to significantly outperform the U.S. beer market."

With the Obregon acquisition and phased buildout of the Mexicali brewery, the company is now targeting the following, which includes the previously announced glass plant expansions:

Mexico Beer Expansion Capital Expenditures (1)
(in millions)
FY 2014 - 2015FY 2016FY 2017FY 2018 - 2021Total (2)
Nava Projects (3)$725$650$550 - $600$525 - $575$2,500
Mexicali Brewery Build (4) $125$225 - $275$1,000 - $1,050$1,400
Total$725$775$775 - $875$1,525 - $1,625$3,900

(1) Some rounding for presentation purposes.

(2) Based on implied midpoint for all ranges.

(3) Includes expansion of the Nava brewery to 27.5M HL of production capacity; and glass plant warehouse, rail and furnace expansion. Expected to be completed by early calendar 2018.

(4) Includes 5M HL of production capacity and land, water rights, infrastructure and other site requirements to accommodate scalability to 20M HL of production capacity. Expected to be completed by end of calendar 2019.

To keep up on all the Mergers & Acquisitions data in real-time, go to our M&A Insider page.



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