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Citigroup: Rackspace Could Be 'Good Fit' For CenturyLink

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In a report published Thursday, Citigroup analyst David Phipps modeled the benefits of CenturyLink (NYSE: CTL) potentially acquiring Rackspace (NYSE: 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 pre-market.

CenturyLink closed at $37.29 on Thursday.

Latest Ratings for CTL

DateFirmActionFromTo
Jul 2016Morgan StanleyDowngradesEqual-weightUnderweight
Jul 2016MacquarieInitiates Coverage onNeutral
Jun 2016Evercore ISI GroupInitiates Coverage onHold

View More Analyst Ratings for CTL
View the Latest Analyst Ratings

Posted-In: Citigroup David PhippsAnalyst Color Long Ideas Short Ideas Analyst Ratings Trading Ideas

 

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