Little did we know when it was announced that AT&T's (T) $85.4 billion deal to buy Time Warner (TWX) would kick off a wave of fall merger and acquisition activity by U.S. telecom companies. In each case, it looks as if the buyers want to use acquisitions to diminish the impact of intense top-line pressures facing their telecom and pay-TV businesses.
Considering how widespread those pressures are, and the cost and network synergies that can be obtained by rolling up smaller players, more deals might be in store.
Nine days after the AT&T/Time Warner deal was announced, CenturyLink (CTL) , perhaps the Rodney Dangerfield of large-cap American telcos, announced that it's buying fiber network owner Level 3 Communications (LVLT) in a $34 billion cash/stock deal. The companies declared that combining their fiber networks would yield superior efficiency and reach, and that the deal would also expand the scope and quality of CenturyLink's broadband and business network offerings.
And on Monday, smaller peer Windstream (WIN) announced it's buying age-old ISP and business data service provider Earthlink (ELNK) in a $1.1 billion all-stock deal. Much like CenturyLink/Level 3, the companies claim the deal will yield a network of "increased scale and scope" that can deliver an expanded set of services to clients, as well as major cost and tax synergies.
AT&T's deal coincided with the release of less-than-flattering third-quarter results, and so were CenturyLink and Windstream's. CenturyLink's business and residential segment revenues fell 1.1% and 2.5%, respectively, on an annual basis, thanks in large part to a 7.9% revenue drop for "Legacy" businesses such as landline phone connections.
Windstream's adjusted service revenue fell 4%, and its total revenue 10%. A 6% drop in households served, together with substantial drops in small business accounts, more than offset a 2% increase in enterprise customers. In addition to landline disconnections, cord-cutting and tough pay-TV and broadband competition from cable providers are weighing on Windstream (AT&T can relate).
The future doesn't look much brighter: Analysts respectively forecast CenturyLink and Windstream's revenue to drop 1.6% and 1.7%. The estimates don't account for their recent deals.
One common financial thread between AT&T, CenturyLink and Windstream: They all have substantial dividends that they're looking to protect. AT&T's dividend yield stands at 5.4%, while CenturyLink and Windstream's are each at 8.9%. All three companies claim their purchases will improve their ability to support their large payouts.
Which other telcos facing similar top-line and dividend challenges might also turn to M&A?