CenturyTel and Qwest Build Telecom Bridge to Nowhere – CTL, Q, T, VZ, S

   

CenturyTel, Inc. (CTL), which is re-branding itself as CenturyLink, has offered $10.6 billion in CenturyTel stock to acquire Qwest Communications (Q). Under terms of the deal, CenturyTel will also assume $11.8 billion of Qwest’s outstanding debt, valuing the acquisition at $22.4 billion, or about $6.02/share of Qwest stock. The merger is expected to close in the first half of 2011, and current CenturyTel shareholders will own approximately 50.5% the merged company.

Neither CenturyTel nor Qwest has proved to be a major force in the wireless revolution. Combined, the two companies have just 850,000 wireless customers, all through Qwest.

Qwest derives about a third of its revenue from its position as one of three carriers for the US government’s Networx program. AT&T Inc. (T) and Verizon Communications  (VZ) are the other carriers. In addition, another 58% of Qwest’s revenue is from landline services. Together, these two services account for 92% of the company’s revenue.

CenturyTel derives about 40% of its revenue from providing local and retail long distance, about half of which the company acquired in 2009 with its purchase of the Embarq assets from Sprint Nextel Corp. (S). Revenues from these landline services are falling and the company plans to offset that decline with integrated offerings of high-speed Internet access and broadband services.

The combined company resembles nothing so much as an attempt to scale up services that face declining subscriber numbers and falling profits. The announcement notes that the transaction is expected to achieve operating and capital synergies that will reduce costs by $625 million over a 3-5 year period following the deal’s closing. The company plans to shave corporate overhead, eliminate duplication of services, and increase operational efficiency.

The trick will be to make all these things happen while prices for services continue to decline. The company will need to market these services aggressively in order to compete, and that will cost money. The merged companies calculate that pro forma free cash flow for fiscal year 2009 would have generated $3.4 billion without taking account of the expected synergies.

CenturyLink, as it will be called, faces an uphill battle against other broadband providers with large subscriber bases. To win customers, the company will need to focus on lower prices. And without a substantial base of wireless customers, there’s no opportunity to compete quickly in the fast growing mobile smartphone market.

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Article printed from InvestorPlace Media, http://investorplace.com/2010/04/centurytel-qwest-merger-ctel-q-t-vz-s-telecom-stocks/.

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