(Reuters) – CenturyLink, Inc. said it would buy Level 3 Communications, Inc., in a deal valued at about $24 billion to expand its reach in the competitive market that provides communications services to business customers.

CenturyLink’s shares slumped 12.4 percent to $26.61 in afternoon trading on Monday, while shares of Level 3 surged 4.9 percent to $56.73.

The cash-and-stock deal, expected to close in the third quarter of 2017, comes as the companies struggle with a slowdown in their core operations and as they face telecommunications rivals like AT&T Inc., Comcast, and Verizon Communications Inc., who also offer internet and phone services to businesses.

CenturyLink aims to create a formidable enterprise telecom player as business clients seek more bandwidth and faster networks to move data traffic.

“We’ve become a much larger and more focused enterprise player,” CenturyLink Chief Executive Glen Post said in an interview after the deal was announced on Monday.

“Together with Level 3, we will have one of the most robust fiber network and high-speed data services companies in the world,” Post said separately in a statement.

Post, who has worked at CenturyLink since 1976, will lead the combined company, while Level 3 Chief Financial Officer Sunit Patel will be chief financial officer.

Analysts were concerned over the fact that CenturyLink will be using its shares to cover the purchase price, which they said would raise its debt-to-equity ratio.

“Our hangup on valuation stems from the fact that CenturyLink is using its shares to fund 60 percent of the purchase price,” Morningstar analyst Michael Hodel said in a research note.

Big Premium

The offer of about $66.50 per share represents a premium of 42 percent to Level 3’s close on Wednesday before reports surfaced on a potential pact between the two companies.

CenturyLink CEO and President Glen F. Post

CenturyLink, which reported third-quarter earnings on Monday, forecast lower-than-expected fourth-quarter revenue of $4.28 billion-$4.34 billion, dragged by a decline in its wireline business. The company expects an adjusted profit of 53-59 cents per share for the quarter.

Analysts polled by Reuters expect revenue of $4.38 billion and earnings of 64 cents in the fourth quarter.

Monroe, La.-based CenturyLink, which provides telephone services mainly in rural areas, has been investing to grow its enterprise business and upgrade its networks in recent years. Level 3 has one of the most desirable global fiber networks and provides internet services to clients like Apple and Netflix.

Including debt, the deal is valued at about $34 billion and would result in cost savings of $975 million per year, CenturyLink executives said on a conference call with investors.

“These are two companies looking for scale and synergies in reaction to the struggles that both companies are facing in their core business to deliver on growth,” BTIG analyst Walter Piecyk said in an email.

CenturyLink, which operates more than 55 data centers in North America, Europe and Asia and provides broadband, voice, video, data and managed services, has been exploring a sale of some of its data center assets. That sale process is underway, CenturyLink executives said on the call.

Colorado-based Level 3 narrowly avoided bankruptcy in the early 2000s and was helped by got a cash infusion of $500 million in 2002 from investors including Warren Buffett. It purchased enterprise company TW Telecom in 2014 for $5.65 billion.

It’s unlikely that the CenturyLink-Level 3 deal would face regulatory hurdles, analysts said.

The global enterprise market is “so crowded with competition, with more and more new entrants building fiber every day that we see little cause for concern by regulators,” Drexel Hamilton analyst Barry Sine said in a research note.

The breakup fee is of a “normal size” and will be divulged when CenturyLink files its merger agreement with regulators shortly, Post said without providing details.

(Reporting by Malathi Nayak in New York; Narottam Medhora and Supantha Mukherjee in Bengaluru; Additional reporting by Lauren Hirsch in New York; Editing by Shounak Dasgupta and Bernadette Baum)

Only half of CenturyLink’s customers in well-populated areas formerly served by Qwest can buy broadband service at 40Mbps or higher, while rural customers fare considerably worse with less than 25% able to get High Speed Internet at those speeds.

Customers have noticed and at least 65,000 canceled their broadband service with the phone company in the second quarter of this year, most presumably switching to their area’s cable operator.

“CenturyLink is by far the most abysmal telephone company I’ve ever had to deal with and I’m 63 years old,” shares Glen Canby in Arizona. Canby is a retired telephone company engineer that spent 40 years with a larger phone company serving the midwestern U.S.  “Their reviews online echo my own experiences, which have ranged from being quoted one price while being billed another, being locked into a term contract you didn’t ask for, and getting only a fraction of the speed they claim to sell.”

Canby is counted as one of CenturyLink’s 40Mbps-qualified customers, yet he actually receives less than 6Mbps service.

But that isn’t what CenturyLink tells the Federal Communications Commission. In a semi-annual broadband deployment report, the company claimed 51 percent of their customers in urban and suburban former Qwest service areas can subscribe to 40Mbps DSL or higher. But whether a customer is “qualified” to buy 40Mbps service is not the same as actually getting the speeds the company markets.

CenturyLink attempts to cover their claims with fine print attached to their FCC submission: “The numbers shown in this chart reflect the percentages of households served by DSLAMs that are capable of providing the specified broadband speeds.” (A DSLAM is a network device typically used to extend faster DSL speeds to customers by reducing the amount of copper wiring between the telephone company’s central office and the customer’s home. Customers in a neighborhood typically share space on a DSLAM, in effect sharing a single connection back to the phone company.)

“That’s clever of them, because of course the DSLAM is just one link in the chain that ends with the ‘last mile’ between that equipment and my home, and that is where CenturyLink’s phone plant is at its weakest,” Canby writes. “I spent 20 years at a phone company dealing with last-mile DSL speed issues, so they cannot fool me.”

Canby blames the condition of CenturyLink’s infrastructure between the DSLAM serving him and his home for the problems, as well as overselling DSL service by packing too many customers onto a single DSLAM.

“It might be 40Mbps service at the remote end, but it drops to around 6Mbps on a good day by the time it reaches my house,” Canby complains. “Once the sun goes down, the speed drops to 3Mbps, which is a classic case of overselling to me because too many people are trying to share one connection at the same time. It has been this way since 2008 according to my neighbors.”

Back then, phone service was provided by Qwest, the former Baby Bell providing service in 14 sparsely populated western U.S. states — Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, and Wyoming. Qwest was acquired by CenturyLink in 2011.

CenturyLink has promised to improve broadband speeds for former Qwest customers, but much of what counts as progress has been in more urban areas, while rural customers continue to languish. The company admits just 21.9 percent of rural households can get 40Mbps service. Only 47.6% can buy 12Mbps, 61.3% can get 5Mbps, and 83% can subscribe to 1.5Mbps. That leaves 17% of former Qwest customers with no broadband options at all. CenturyLink did not break out the percentage of customers that meet the FCC’s 25Mbps minimum speed definition of broadband.

“This is why CenturyLink loses customers to cable operators who have no problems trying to deliver internet access over their network, because it was built to support more bandwidth,” Canby shares. “They can usually deliver the same internet speed to customers no matter how far out they live while phone companies deal with a network built for making phone calls, not data.”

Company officials recognize they could do better and have promised investors another 2.5 million customers will be able to reach 40Mbps by the end of 2017. By the end of the year after that, CenturyLink hopes to reach 85% of customers with VDSL2, bonding, and vectoring technology to achieve 40Mbps service for most customers in their top 25 markets. But rural customers are likely to left waiting longer because of the costs to upgrade Qwest’s copper-based network, especially in smaller states like Idaho, the Dakotas and Wyoming.

“The only answer is cable or fiber broadband, and if you live in a small community it could be years before CenturyLink gets around to you,” Canby writes. “If it’s the same story all over town, I’d start advocating for a community-owned fiber network and not sit around and wait for CenturyLink to act, especially if there is no cable company in town.”

An attempt by CenturyLink to win near-complete deregulation for all of its 108 telephone exchanges in Minnesota has been met with strong objections from the Department of Commerce and the Minnesota Attorney General’s office because CenturyLink couldn’t be bothered to provide enough information to prove its case.

“In essence, a carrier filing a petition [for deregulation must] ‘show its work’ in the initial filing in order to have a complete petition for review,” wrote the Attorney General’s office. “CenturyLink has not shown its work. As a result, any analysis of the merits of the petition is both premature and impossible, given the lack of detail provided in the petition. The filing of the superficial results of analyses performed by the company with no supporting data or workpapers does not allow for any analysis necessary on the merits of the petition. This leaves the commission with a take-it-or-leave-it approach and shuts out other parties’ ability to perform analysis of the petition using the same data set relied upon by the company. Such scant data would not be allowed in any other commission proceeding.”

The two state agencies, in addition to some public interest groups, object to CenturyLink’s claim that since they now serve fewer than 50% of households and competing services are available to at least 60% of customers in each of their exchanges, they should no longer be regulated.

But unlike many other states, Minnesota law requires the burden of proof be met by CenturyLink, and in this case that requires a clear record of evidence of customer losses as a result of direct competition, according to the state agencies.

The Attorney General’s office believes CenturyLink used proprietary data and other unexplained criteria difficult to impossible for independent third parties to verify. The Attorney General complained, “parties must take CenturyLink at its word that its analysis is accurate.”

One requirement mandates that phone companies seeking regulatory relief provide a list of local services offered in each exchange, to verify if competitors are providing a comparable level of service. CenturyLink admitted it winged it, never submitting an actual list of local services but instead a link to its national website.

When asked why the company omitted the list, a company representative told the Office of the Attorney General they didn’t think it was important.

Other examples:

• CenturyLink’s list of exchange areas was developed using proprietary data using an “allocation tool” that requires everyone involved in the case to take CenturyLink at its word the analysis is accurate and complete;
• CenturyLink was required to prove how many competitive providers were available to customers in each exchange. CenturyLink took a short cut, supplying a list of “major” wireless providers and cable companies alleged to be supplying service in the area with no verification or data source to generate the list. For proof of coverage, CenturyLink took screen shots of wireless provider coverage maps used in marketing material, with no proof customers actually get adequate coverage in those areas.
• CenturyLink footnoted in tiny print it was beginning to offer unregulated Voice over IP phone service, but had no customers as of Dec. 31, 2015. It did not say anything about its plans for 2016. Should CenturyLink launch VoIP, they will be able to offer unregulated phone service in Minnesota and elsewhere, possibly negating the need to ask for deregulation.

Earlier this week, CenturyLink filed its response, effectively telling regulators they cannot dismiss the company’s petition based on the complaints from the two state agencies.

“The agencies’ arguments misread the relevant statute, confuse the distinction between completeness and sufficiency, and should be summarily rejected,” CenturyLink argued. “The statute clearly does not contemplate that all issues … must be unequivocally resolved before a petition is deemed complete. If that were the case, there would be no need for the 180 day review period.”

The proceeding is still ongoing, although it was originally supposed to take a maximum of six months.

CenturyLink will begin a usage-based billing trial in Yakima, Wa., starting July 26 that will combine usage caps with an overlimit fee on customers that exceed their monthly usage allowance. The trial in Washington state may soon be a fact of life for most CenturyLink customers across the country, unless customers rebel.

Already at a speed disadvantage with its cable competitors, CenturyLink will likely alienate customers with a new 300GB usage cap on DSL customers who can manage speeds up to 7Mbps, and 600GB for those lucky enough to exceed 7Mbps. Customers will be given a browser-injected warning when they reach 65% and 85% of their allowance. If a customer exceeds it, they will have overlimit fees forgiven twice before the usual de facto industry overlimit penalty rate of $10 for 50 additional gigabytes will be added to their bill, not to exceed $50 in penalties for any billing cycle.

DSL Reports received word from readers in Yakima they had the unlucky privilege of serving as CenturyLink’s first test market for hard caps and overlimit fees, and was the first to bring the story to the rest of the country.

CenturyLink hasn’t wanted to draw much attention to the usage-based billing change, quietly adjusting their “excessive usage policy FAQ” that takes effect on July 26. But it has begun directly notifying customers who will be enrolled in the compulsory trial.

“Data usage limits encourage reasonable use of your CenturyLink High Speed Internet service so that all customers can receive the optimal internet experience they have purchased with their service plan,” states the FAQ.

But counterintuitively, CenturyLink will exempt those likely to consume even more of CenturyLink’s resources than its low-speed DSL service allows by keeping unlimited use policies in place for their commercial customers and those subscribed to gigabit speed broadband.

CenturyLink’s justification for usage caps with customers seems to suggest that “excessive usage” will create a degraded experience for other customers. But CenturyLink’s chief financial officer Stewart Ewing shines a light on a more plausible explanation for CenturyLink to slap the caps on — because their competitors already are.

“Regarding the metered data plans; we are considering that for second half of the year,” Ewing told investors on a conference call. “We think it is important and our competition is using the metered plans today and we think that exploring those starts and trials later this year is our expectation.”

CenturyLink’s new overlimit penalties (Image courtesy: DSL Reports)

In fact, CenturyLink has never acknowledged any capacity issues with their broadband network, and has claimed ongoing upgrades have kept up with customer usage demands. Until now. On the west coast, CenturyLink’s competitors are primarily Comcast (Pacific Northwest) and Cox Communications (California, Nevada, Arizona). Both cable operators are testing usage caps. In many CenturyLink markets further east, Comcast is also a common competitor, with Time Warner Cable/Charter present in the Carolinas. But in many of the rural markets CenturyLink serves, there is no significant cable competitor at all.

Usage Cap Man is back, protecting high profits and preserving the opportunity of charging more for less service.

As Karl Bode from DSL Reports points out, for years CenturyLink has already been collecting a sneaky surcharge from customers labeled an “internet cost recovery fee,” supposedly defraying broadband usage and expansion costs. But in the absence of significant competition, there is no reason CenturyLink cannot charge even more, and also enjoy protection from cord-cutting. Customers who use their CenturyLink DSL service to watch shows online will face the deterrent of a usage cap. Customers subscribed to CenturyLink’s Prism TV will be able to access many of those shows on-demand without making a dent in their usage allowance.

For years, American consumers have listened to cable and phone companies promote a “robust and competitive broadband marketplace,” providing the best internet service money can buy. But in reality, there is increasing evidence of a duopoly marketplace that offers plenty of opportunities to raise prices, cap usage, and deliver a substandard internet experience.

As Stop the Cap! has argued since 2008, the only true innovations many phone and cable companies are practicing these days are clever ways to raise prices, protect their markets, and cut costs. Consumers who have experienced broadband service in parts of Asia and Europe understand the difference between giving customers a truly cutting-edge experience and one that requires customers to cut other household expenses to afford increasingly expensive internet access.

We recommend CenturyLink customers share their dislike of CenturyLink’s style of “innovation” in the form of a complaint against usage caps and usage-based billing with the FCC. It takes just a few minutes, and adding your voice to tens of thousands of Americans that have already asked the FCC to ban usage caps and usage pricing will keep this issue on the front burner. It will help strengthen our case that providers must stop treating internet usage as a limited resource that has to be rationed to customers. Wall Street believes the FCC has given a green light to usage caps and usage pricing, and the risk of attracting regulator attention by imposing higher broadband prices on consumers is pretty low. We need to change that thinking so analysts warn providers against being too greedy, out of fear the FCC will impose a regulatory crackdown.