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CenturyTel-Qwest deal is a rural double-down

Steve Alexander

Star Tribune

April 23, 2010

Qwest Communications, Minnesota's biggest telephone company but the smallest of the remaining regional Baby Bell firms spun off from AT&T, is being acquired by CenturyTel Inc. of Louisiana in a $10.6 billion stock swap.

The result of the acquisition will be a largely rural-focused telephone company that will serve 37 states, have 50,000 employees and generate annual revenue of $19.8 billion. It would have 17 million wired telephone lines, 5 million broadband customers and 850,000 cell phone users.

The deal is a tax-free stock transaction with a total value of $22.4 billion, including the assumption by CenturyTel of $11.8 billion in Qwest debt. Based on April 21 closing prices, Qwest shareholders would receive $6.02 in CenturyTel stock for each Qwest share, a 15 percent premium over Qwest's Wednesday closing price.

Qwest stock closed at $5.37 a share Thursday, up 13 cents, or a little more than 2 percent. CenturyTel, which operates under the name CenturyLink, closed at $35.01, down $1.19 a share or a little over 3 percent.

The acquisition caps a long financial struggle for debt-strapped Qwest, which endured an accounting scandal, the restatement of 2000 and 2001 financial reports, the 2002 write-down of half its assets and the insider-trading conviction of its former CEO, Joe Nacchio.

The deal also continues the consolidation of the telephone industry that has seen the disappearance of former big names such as MCI. In this case, the nation's fifth-largest local telephone company, CenturyTel, is buying the third-largest, Qwest, in hopes of saving more than $600 million annually through economies of scale.

How the acquisition will affect most of Qwest's 30,000 employees remains unclear. CenturyTel said only that Qwest's Denver headquarters will move to Monroe, La., CenturyTel's headquarters.

But the union representing Qwest employees has its own ideas. Based on the acquisition's projected savings, about 6,000 people nationwide are likely to lose their jobs, said Timothy Donovan, president of Local 7200 of the Communications Workers of America, based in Minneapolis, which represents about 1,135 Qwest workers. (Local 7201 in St. Paul represents additional Qwest workers.)

"The question will be whether the layoffs are management or union members," Donovan said. "It's too early to say what's going to happen."

Qwest now serves 14 states, including Minnesota, where it has 3,300 employees. CenturyLink operates in 33 states, and has a scattering of mostly rural telephone exchanges in Minnesota that have a total of 150 employees.

For Qwest's consumer customers, particularly those in rural areas, the acquisition may be good news. CenturyTel would be larger and financially stronger than Qwest, and thus in a better position to introduce services such as broadband in rural areas that lack it.

But CenturyTel says it will have to spend as much as $1 billion to achieve the projected operating savings. It's unclear how much CenturyTel will be able to invest in rural telecom.

"The real danger to consumers is that the projected savings will not be enough to lead to significant investment in rural broadband," said James Farstad, president of Minneapolis consulting firm Farstad.US.

Analysts had for years anticipated that Qwest would be acquired because it was financially weak and lacked the services needed to compete head-on with cable TV companies offering voice, video and data services, said Roger Entner, the head of telecom research at the Nielsen Co. in New York.

"Qwest was the first large phone provider who lost the No. 1 position in a large-city market," Entner said. "That was in Omaha, Neb., and Qwest lost majority status to Comcast."

Qwest's biggest long-term problem is shared by other traditional wired telephone companies: Customers are switching to cell phones, with the number of telephone land lines decreasing by 7 to 10 percent a year, analysts said. While the other surviving Bell companies, AT&T and Verizon, regained some customers by selling them cell phone services, Qwest had exited the cell phone business and only resold the cell services of other companies.

By combining operations of CenturyLink and Qwest, the new company will follow a contrarian strategy, Farstad said. It'll concentrate on rural wired telephone service at a time when larger regional telephone firms such as Verizon and AT&T are focusing on cell phone coverage and urban areas.

"You've got companies going in the very opposite direction," Farstad said. "AT&T has 85 million wireless customers and about 45 million land lines. Verizon has got 90 million wireless customers and more than 20 million land lines." But the combined Qwest/CenturyTel would have 850,000 wireless customers and 17 million land lines.

CenturyTel's rural approach is not without risks. Some analysts believe the federal government will realign its subsidies to support broadband lines instead of rural phone service, as is the case today. Those rural telephone subsidies are a large source of revenue for companies such as CenturyTel.

One of Qwest's big advantages in seeking a buyer was its long-haul national fiber-optic telephone network, which carries large amounts of data as well as phone calls, Farstad said. CenturyTel has a smaller fiber network, but together they will have 173,000 miles of fiber across the country.

The acquisition is expected to close in the first half of 2011, but it must first be approved by the Federal Communications Commission, the U.S. Department of Justice and state telecom regulators, including the Minnesota Public Utilities Commission. The two companies have not filed with the Minnesota commission yet, but when they do, the approval process should take "a year or less," said Mark Oberlander, the commission's telecommunications manager.

Steve Alexander . 612-673-4553