CenturyTel, Embarq: Strength in Economic, Reg Tumult

Wireless Broadband, Expanded Business Services on Tap

As mergers go, the $5.8 billion, all-stock deal between CenturyTel Inc. (CTL) and Embarq Corp. (EQ) isn’t earth-shattering. It’s not likely to spark a frenzy of RLEC consolidation, analysts said, and competition won’t suffer because few, if any CLECs, target rural markets. Nonetheless, the timing of the transaction, as well as its details, are compelling. It comes as both carriers lose thousands of wireline subscribers to VoIP and wireless each quarter. More importantly, though, CenturyTel and Embarq are marrying amid tight credit markets and pending regulatory reform. Whatever happens with the economy, and whatever changes emerge from the FCC, CenturyTel and Embarq will be better off facing the turbulence as one entity. They’ll be able to move beyond their core strengths into areas including broadband wireless and expanded business services. On the whole, they’ll be able to at least maintain profitability, if not raise it altogether.

CenturyTel, the nation’s seventh-largest ILEC, announced Oct. 27 it would buy the larger Embarq in a $5.8 billion stock swap. The amount technically will total $11.6 billion since CenturyTel also agreed to assume Embarq’s $5.8 billion debt — it has bank agreements to refinance the debt upon closing, which should happen in 2009’s second quarter. The two united will create the fourth-largest ILEC in the United States, serving 33 states and boasting 8 million access lines, 2 million broadband customers and, through partnerships, approximately 400,000 video subscribers. Glen Post, CenturyTel’s chairman and CEO, will remain in that position. And Embarq CEO Tom Gerke will serve as executive vice chairman of the combined company. The company’s name and brand have yet to be determined. Headquarters will stay in Monroe, La., but CenturyTel will keep Embarq’s facilities in Overland Park, Kan. Joined, the carriers forecast sales of nearly $9 billion and free cash flow of about $1.8 billion.

Better Together

The merger of two price-capped ILECs couldn’t have come at a more tumultuous time, said Jessica Zufolo, telecom analyst for Medley Global Advisors. Both carriers are recording lower access line revenue and, subsequently, fewer Universal Service Fund (USF) subsidies as users choose VoIP and wireless services over wireline. And if the FCC goes through with its proposed intercarrier compensation/USF (ICC/USF) reform on Nov. 4, the RLEC sector stands to lose billions in access revenue, Zufolo said.

“The potential changes to the current access fee structure are significant and may end up being material for both companies,” she added. Indeed, the FCC’s threat to overhaul ICC/USF in a matter of weeks “may have forced a deal to come together as quickly as it did.”

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