CenturyTel, seeking scale, to buy Qwest for $10.6B

 

Houston Chronicle

By Peter Svensson, AP Technology Writer

© 2010 The Associated Press

April 22, 2010

NEW YORK — CenturyTel Inc., the country's fifth-largest local-phone company, said Thursday that it will buy Qwest Communications International Inc., the third-largest, in a stock swap worth $10.6 billion to gain the benefits of scale in a shrinking business.

The combined company would have about 17 million phone lines serving customers in 37 states, but would still be dwarfed by AT&T Inc. and Verizon Communications Inc. It would be based at CenturyTel's headquarters in Monroe, La., rather than in Denver, where Qwest is based.

The deal would shore up the combined company by helping it reduce expenses and improve its ability to compete with cable. But it would still be in the grip of a dismal trend: The number of landlines in the U.S. shrinks by about 10 percent per year as consumers chose to rely on their wireless phones or service from cable companies. The fourth-largest provider of landline phone service in the country, by number of subscribers, is now cable company Comcast Corp.

Neither Qwest nor CenturyTel own wireless networks that can compensate for the loss of landlines, as AT&T and Verizon do. Last year, 22.7 percent of homes used only cell phones, according to a survey by the Centers for Disease Control and Prevention.

But Qwest and CenturyTel hope the acquisition can make their combined company more competitive as a provider of telecommunications services to businesses and expand the reach of their broadband Internet service for consumers. It may also provide TV services over phone lines to compete more aggressively with cable, according to Glen Post, the CEO of CenturyTel, who would head the combined company. CenturyTel has started providing TV services on a small scale in some areas.

Analyst David Dixon at FBR Capital Markets noted that the federal government is moving to shift subsidies away from rural phone service and toward broadband lines. Rural phone subsidies are a large source of revenue for CenturyTel, and the shift could be a challenge.

The deal would likely to lead to job cuts at the companies, which are already shedding positions. The Communications Workers of America, the largest union in the telecommunications industry, said it "looks forward to serious discussions" with both companies. Qwest had 30,138 employees at the end of last year, while CenturyTel had about 20,000.

Qwest provides traditional phone service in 14 mostly Western states. Originally a long-distance and Internet service provider, it bought US West in 2000 in a process that started as a hostile takeover. US West was one of the seven "Baby Bells" formed when the federal government broke up the AT&T monopoly in the 1980s.

The government broke up the AT&T monopoly to foster competition when landline phones were the prime means of two-way communications in the country. Today, phone lines are declining in importance and number, and the phone companies are combining, reversing the effects of the breakup.

The US West deal and accounting shenanigans in the following years left Qwest struggling under a heavy debt load. Though it has managed to shore up its finances substantially in recent years, it was still an unlikely acquirer.

CenturyTel, on the other hand, has an investment-grade credit rating, giving it the flexibility to buy the larger Qwest. It was not part of the original AT&T system, and it has expanded by buying up other, mostly rural, independent phone companies. Last year, it bought Embarq Inc., the landline service company once part of Sprint, giving it an urban presence as well. To reflect that deal, CenturyTel now does business as CenturyLink. It provides service in 33 states, but its presence is small in most of them. It's biggest in Florida, Nevada, North Carolina, Missouri, Texas, Virginia and Wisconsin.

CenturyTel's Post said it had not been decided which brand would be used after the acquisition, but he said he's leaning toward using "CenturyLink" for the consumer business and perhaps including the "Qwest" name when marketing to businesses.

CenturyTel is offering stock worth about $6.02 per share for each Qwest share, a premium of about 15 percent to Qwest's Wednesday closing price of $5.24.

Qwest stockholders would receive 0.1664 CenturyTel shares for each share they own and hold 49.5 percent of the new company, while CenturyTel stockholders would own 50.5 percent of the business.

Ed Mueller, the CEO of Qwest, pointed out on a conference call with investors and analysts that Qwest shareholders would benefit from CenturyTel's higher quarterly dividend if the deal goes through. Qwest's dividend is now worth 32 cents per share. Under the terms of the deal, Qwest shareholders would be getting the equivalent of 48 cents per share in future dividends.

CenturyTel would also assume $11.8 billion in Qwest debt.

Both companies' boards have approved the tax-free acquisition, which is expected to close in the first half of 2011. They expect the acquisition to save the combined company $625 million over three to five years following the close of the deal.

Qwest shares rose 26 cents, or 5 percent, to $5.50 in early afternoon trading, while CenturyTel fell 69 cents, or 1.9 percent, to $35.51.

The deal will be reviewed by the Federal Communications Commission and either the Justice Department or the Federal Trade Commission. State telecommunications regulators will also examine the transaction.

Analysts said the deal is likely to be approved by regulators because they mostly operate in different areas. However, they could attach conditions, such as an obligation to expand high-speed Internet access or to provide it at certain prices.

AP Business Writers Andrew Vanacore in New York and Joelle Tessler in Washington contributed to this report.