Did the CenturyLink and Level 3 Merger Destroy Their Stock Charts?

Companies often take on a big risk when they announce a big acquisition. After all, shares of an acquirer often sell-off as the shares of the company being acquired rise. Investors have learned over time that integrations can take years to accomplish. In other cases, those integrations just never really pan out.

In the case of the $34 billion merger between CenturyLink Inc. (NYSE: CTL) and Level 3 Communications Inc. (NYSE: LVLT), the deal may have done more than just pressure the acquirer. The initial read a few days after the deal’s announcement could suggest that CenturyLink and Level 3 just ruined their stock charts for some time ahead. Still, CenturyLink did announce later in the week that it is selling its data center business for $2.15 billion in a fresh news announcement.

The two charts from StockCharts.com (see below) show that CenturyLink initially popped ahead of the deal but then its reversal was severe. In the case of Level 3, its chart was heading higher but did not even make it worth more than its peak in July.

CenturyLink will pay $26.50 per share in cash and 1.4286 shares of stock for Level 3, and that works out to a per share price of $66.50. CenturyLink also will assume some $9 billion in Level 3’s debt. That implied price was before the reactions were seen in the week ending October 4.

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Analysts have taken very mixed views, with many price target changes. Some have even suggested that the merger now makes two large leveraged companies just larger without addressing some of the headwinds that they face in the years ahead.

CenturyLink was maintained as Underperform at Jefferies earlier in the week, and the price target was cut to $20 from $24 (versus a $26.58 prior close, and already after a 12.5% drop). The firm noted that the Level 3 buyout does not resolve its long-term concerns and falls short in transforming the business.

A standout call was from Cowen, raising its target to $29 from $28. Other calls were seen as follows:

• Deutsche Bank cut its CenturyLink target to $26 from $29.
• RBC Capital Markets cut its CenturyLink target to $28 from $31.
• UBS cut its CenturyLink target to $31 from $36.

The ratings and target changes on Level 3 Communications were as follows:

• Goldman Sachs cut it to Neutral from Buy but raised its target to $60 from $55.
• Jefferies cut its rating to Hold from Buy and cut its target to $55 from $58.
• RBC Capital Markets cut it to Sector Perform from Outperform but raised the target to $63 from $58.
• UBS raised its target price to $71 from $60.

CenturyLink shares were up 0.2% at $23.05 on Friday’s closing bell. It has a 52-week range of $21.94 to $33.45, and a $28.20 consensus analyst price target from Thomson Reuters. Level 3 shares were last seen up 0.3% at $51.50. Its 52-week range is $41.73 to $57.59, and it has a consensus price target of $61.67.

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Chart watchers are a different lot than fundamental investors. They see that a chart is telling them everything without having to analyze the underlying fundamentals. Here are those stock charts.