CenturyTel to buy Qwest in $10.6 billion stock swap

The combined company would remain in the No. 3 spot among phone companies, behind AT&T and Verizon.

 

By Andy Vuong
The Denver Post

April 23, 2010

 

 

Denver-based Qwest, a company with deep Colorado roots and an iconic presence in the downtown skyline, announced a $22 billion merger Thursday that will relocate its corporate headquarters.

The nation's third-largest local phone-service provider will be acquired by smaller, rural operator CenturyTel for more than $10 billion in stock and $11.8 billion in assumed debt.

The combined company will be based at CenturyTel's headquarters in Monroe, La., employ roughly 50,000 and serve 17 million landlines in 37 states. Layoffs loom, with many expected to hit Colorado, where Qwest employs nearly 8,000.

Though the deal will mark a bittersweet end for a one-time telecommunications high-flier, a merger was inevitable, experts say, given Qwest's mountain of debt, declining business and lack of a wireless network.

The company's core wireline operation has deteriorated in recent years as customers replace home landlines with cellphones or Internet phone service. In 2009, Qwest's landlines fell 11 percent, from 11.6 million to 10.3 million.

Without a cellphone business to offset that drop in revenue, the company has depended largely on cost cuts to stay profitable.

The merger will shave an estimated $575 million in annual operating costs for the combined company. It will also shift Qwest's debt load — which nearly forced the company into bankruptcy in 2002 — to a firm viewed more favorably by creditors and investors.

For CenturyTel, which also lacks a wireless network, swallowing Qwest allows it to grow even as landlines drop industrywide. It gains Qwest's strong business-services division, which includes government contracts, and 3 million broadband subscribers.

"It's unfortunate, but it was probably inevitable given the financial straits that Qwest found itself in," said Raymond Gifford, a former chairman of the Colorado Public Utilities Commission. "It's not quite the death knell of telecom in Colorado — we still have TW Telecom and Level 3 — but it's certainly the disappearance of another iconic Colorado company."

The deal, which requires regulatory approval, is expected to close in nine to 12 months and is the second-largest merger-and-acquisition transaction announced this year. The combined company would remain in the No. 3 position among phone companies, behind AT&T and Verizon.

CenturyTel chief executive Glen Post will lead the new company, with Qwest chief executive Ed Mueller gaining a seat on the board of directors. The name for the combined company wasn't disclosed, though CenturyTel recently began operating as CenturyLink after acquiring another rural phone line operator.

Job cuts are expected

Civic leaders expressed hope Thursday that CenturyTel would maintain a major presence in Colorado. In addition to the neon-blue Qwest sign atop its 52-story headquarters building at 1801 California St., the company's impact is felt through sponsorships and support of various events and organizations.

Al Kogler, a spokesman for the Communications Workers of America District 7, which represents 18,300 Qwest workers, said he was "cautiously optimistic" about the deal. The union has been assured that its contract, which runs through the fall of 2012, will be honored, he said.

Hundreds, perhaps thousands, of jobs are likely to be cut, based on previous CenturyTel acquisitions.

Qwest has roughly 10 million access lines in 14 states and CenturyTel operates 7 million in 33 states. The companies overlap in 10 states, including Colorado.

"I bet you a year from now, there's no Qwest sign on that tower," said Donna Jaegers, an analyst with D.A. Davidson & Co. in Denver. "The people that work in headquarters as staff doing financial or accounting functions, those are the people that have to worry."

Qwest employs about 2,600 at its headquarters building, though it disclosed plans in February to move 1,200 to nearby offices.

Mueller said Qwest workers will be "much less affected than people think."

"This is not an overlapping merger where we both do the same thing and one's got to go away," said Mueller, who took over at Qwest in August 2007.

Qwest's business markets division, which accounts for about a third of the company's $12 billion in annual revenue, will be based in Denver. The head of that group, Christopher Ancell, will hold the same position with the combined company.

Mueller said he hasn't decided what he will do after the merger, though he plans to stay in Denver. The futures of other top Qwest executives, including chief administrative officer Rich Baer and chief operating officer Teresa Taylor, are to be determined.

Under terms of the deal, Qwest shareholders will receive 0.1664 CenturyTel shares for each Qwest share. Based on Thursday's closing prices, that translates to $5.83 of CenturyTel stock for each Qwest share, a 9 percent premium over Qwest's close of $5.37.

The deal doesn't include a provision that would allow either party to cancel the transaction if share prices drop below a certain level. Qwest stock rose 13 cents, or 2.5 percent, on Thursday while CenturyTel shares dropped $1.19, or 3.3 percent, to $35.01.

Some employees were optimistic Thursday despite the prospect of additional layoffs.

"This is a merger and expansion," said Victor Kinard, a Qwest sales representative. "Anytime you have another widget to sell, you're excited."

Analysts expect regulators to approve the deal because the companies operate similar businesses and CenturyTel has been recognized for offering good service in areas that are often difficult to serve.

UBS analyst John Hodulik said it's unlikely other potential Qwest suitors — Windstream and Frontier Communications — will offer competing bids because they face near-term hurdles related to recent acquisitions and debt provisions.

Qwest's Colorado roots date back many decades, though its present-day operations stem from the antitrust breakup of AT&T, or Ma Bell, in the early 1980s. In the early 1990s, three regional Bell operating companies consolidated to form U S West. That company merged with Qwest in 2000 in a $45 billion deal. At the time, Qwest was a fast-growing startup spending billions of dollars on a fiber- optic communications network that would carry the nation's Internet traffic.

But operators overbuilt as demand for network capacity never reached supply. That left Qwest, which borrowed heavily to build the network and acquire U S West, with more than $25 billion in debt and insufficient revenue to service it.

Qwest was also rocked by an accounting scandal during the tenure of former chief executive Joe Nacchio, who served from 1997 to 2002. The company later restated billions of dollars in revenue, and the now-imprisoned Nacchio was convicted on criminal insider trading charges in 2007.

CenturyTel is described as an old school, wireline company that has grown through acquisitions.

"The terms of CenturyTel's deals are we buy you and we run the phone company out of Monroe, La., which is not exactly what you would think of as a major headquarters city," said Gifford, now an attorney with Wilkinson Barker Knauer.

While CenturyTel has focused largely on serving rural customers, acquiring Qwest gives it several metro markets, including Denver and Phoenix.

"Century's biting off a big challenge here," Jaegers said.

Staff writer Kevin Vaughn contributed to this report. Andy Vuong: 303-954-1209, avuong@denverpost.com or twitter.com/andyvuong