Rackspace Could be "Good Fit" for CenturyLink, According to Citi

In a report published Thursday, Citigroup analyst David Phipps modeled the benefits of CenturyLink CTL potentially acquiring Rackspace RAX. “A Good Fit” Although no deal has been announced, Phipps noted that Rackspace could be “a good fit” as “1) It doubles data services segment sales. 2) It adds needed revenue growth. 3) It increases customer stickiness. 4) It modestly raises leverage.” Citigroup remarked that a prospective cash deal for Rackspace could raise leverage, require roughly $6 billion in funding and result in a credit downgrade. This model uses 100 percent debt financing to acquire Rackspace for a 20 percent premium at $44 per share and $45 million deal synergies. Ratings The analyst commented, “If CTL increases leverage through M&A, we would expect a ratings downgrade at CTL (now Ba2/BB) and potential downgrades at Qwest and Embarq.” Citigroup maintains a Sell rating on the 2015-2017 bonds and a Neutral rating for the 2021-2023 notes and 2028-2031 long duration bonds Stock Action Shares of Rackspace closed at $36.70 on Thursday. The stock is currently trading at $36.75 premarket. CenturyLink closed at $37.29 on Thursday.