CenturyTel, Embarq: Strength in Economic, Reg Tumult

Wireless Broadband, Expanded Business Services on Tap

Actually, the wheels already were in motion, said Judy Reed-Smith, CEO of research firm ATLANTIC-ACM. Proceedings just happened to solidify as FCC Chairman Kevin Martin tries to push ICC/USF reform and as the economy tumbles into recession.

“They put themselves up before this huge debacle,” she said. That’s because both CenturyTel and Embarq have known “for years” that wireline losses were ahead, what with AT&T Inc.’s (T) U-verse and Verizon Communications Inc.’s (VZ) FiOS products. Embarq has been trying to determine how best to handle that competition, Reed-Smith said, “and may not have had enough backing to build its own network for broadband.”

Enter CenturyTel. The company offers fiber-based broadband thanks to the LightCore acquisition, and owns portions of 700MHz spectrum, which will facilitate mobile broadband. But CenturyTel needed a quid pro quo. It found that in Embarq’s business services division and more urban footprint.

“Embarq has a strong business position and a bit of an edge in terms of ... the market,” said Cindy Whelan, senior analyst of business network services for Current Analysis Inc. If CenturyTel can expand those services in its traditional territories, “certainly I think that would be a positive.”

Another leg up for the deal is CenturyTel’s 700MHz spectrum holdings. CenturyTel spent more than $150 million on 48 licenses throughout the South, and parts of the Northeast and Southwest, in the FCC auction that took place earlier this year. Medley Global’s Zufolo called the purchases “a proactive step” toward offsetting wireline churn.

To be sure, CenturyTel and Embarq plan to pursue wireless broadband thanks to CenturyTel's current bandwidth real estate. But Post said executives also will look for “opportunities to build spectrum other carriers have today and don’t want to build” in CenturyTel-Embarq markets.

“It’s a viable investment and can drive value for shareholders long term and certainly can improve the offerings for our customers,” Post told analysts.

Not everyone’s sold.

“There’s not a lot of capacity” in CenturyTel’s 700MHz spectrum holdings, said Eric Kainer, principal of networking and communications research at investment bank ThinkPanmure. “Unless they can get incredible density with femtocells ... I am very skeptical.”

Stock Smart

Yet none of this would be under discussion had CenturyTel and Embarq relied on Wall Street for funding. In this, the worst economy America has seen in 30-odd years, banks and other investors are hoarding cash, lending only to the most scrutinized borrowers. And they’re taking their time about it. If CenturyTel and Embarq wanted to seal a deal before the Bush administration leaves office, as some analysts speculated, a shares exchange was the way to go.

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