By William Patalon III
Money Morning/The Money Map Report
The deal should be good for the two companies, said Jeff Kagan, an independent analyst who is well known for his coverage of the telecom sector.
“There has been a lot of talk recently about Embarq wanting to be acquired,” Kagan told MarketWatch.com. “However, the financial crisis that is on the front page every day made finding a partner difficult. That may have lowered the price Embarq hoped to get. CenturyTel saw an opportunity and jumped in to acquire Embarq. Timing was on CenturyTel's side in this deal.”
The all-stock deal – announced yesterday (Monday) – calls for CenturyTel to pay $5.8 billion for Embarq, and to assume $5.8 billion of that company’s debt, Network World reported. The buyout will knit together two phone companies with a local/regional focus that cater chiefly to customers in less-populated parts of the country, MarketWatch reported. The new combined venture will have operations in 33 states and combined revenue of more than $8.8 billion.
The acquisition “makes great strategic sense,” Glen F. Post III, the chairman and chief executive officer of CenturyTel, who will assume the CEO’s mantle with the merged company, said during a conference call yesterday. “It diversifies our revenue and provides us with expanded networks, expertise and financial resources to build long-term shareholder value.”
U.S. telecom carriers have spent at least $150 billion on acquisitions during the past three years as they bulk up to slash operating expenses – and to match up better against new rivals emerging from such businesses as cable TV and wireless communications. Already this year, Verizon Communications Inc. (VZ) agreed to buy Alltel Corp. for $5.9 billion in cash and $22.2 billion in debt, a move that makes it the largest U.S. phone company, Bloomberg News said.
Verizon reported its third-quarter earnings yesterday. [For additional details, check out Money Morning’s Global Investing (News) Roundups, elsewhere in this issue.]
CenturyTel rebuffed a $9.2 billion offer from Alltel in 2001, selling the phone-service operator its wireless assets instead.
Analysts expect the deals to continue – and probably to accelerate. Indeed, Credit Suisse Group AG (ADR: CS) analyst Chris Larsen wrote in a research note that the CenturyTel/Embarq merger would likely serve as the catalyst for the long-expected wave of consolidation deals between rural telecom carriers. Those deals could well include a move by Windstream Corp. (WIN) – the second-biggest rural carrier – to buy out the much-smaller Frontier Communications Corp. (FTR).
“We think a Windstream/Frontier transaction is the next most logical [deal],” Larsen wrote.
CenturyTel may also look at doing more deals within in a year, if there are more buyout opportunities that match up well, Post, the CEO, said.
Embarq solicited offers earlier this year, but the company’s plans to auction itself off to the highest bidder were shelved by the global credit crisis, which made it tough for potential suitors to line up financing for any deal. In early October, however, news reports surfaced that Embarq had hired JPMorgan Chase & Co. (JPM) to look for buyers for the company.
The Overland Park, Kan.-based Embarq is the local phone company created by the 2006 spin-off from Sprint Nextel Corp. (S), and its service area covers 18 states. It provides local and long-distance communications services to both consumer and business customers. This includes voice, data, high-speed Internet, satellite video and wireless services, sold both on a wholesale level and through third parties.
CenturyTel also provides local and long-distance voice, Internet, broadband and television services in 25 states. As of Dec. 31, its local exchange telephone services unit operated 2.1 million telephone access lines in 24 states, of which about 70% were concentrated in Alabama, Arkansas, Missouri, Wisconsin and Washington.
The buyout price of $40.42 per share for Embarq represents a 36% premium over the company’s closing share price from Friday. Since Embarq is twice as big as CenturyTel, Embarq shareholders will own about 66% of the combined company after the deal closes.
Although Embarq is the larger of the two companies, it faces greater competition from cable operators and other telecom-service providers because it operates in some urban and suburban markets. The Monroe, La.-based CenturyTel operates almost entirely in rural areas where competition is less intense.
But the newly merged venture should be much more competitive overall, since it could realize annual savings of about $400 million within three years, executives with both CenturyTel and Embarq said on yesterday’s conference call.
While Post remains as CEO of the merged company, Embarq CEO Thomas A. Gerke will stay on to serve as executive vice-chairman.
CenturyTel yesterday reported operating revenue of $650 million for the third quarter of 2008, down more than 8% from the same quarter in 2007. Net income was $82.8 million, down more than 23% from a year ago.
Embarq yesterday reported operating revenue of $1.5 billion for the third quarter of 2008, down about 4% from the third quarter of 2007. Net income was up nearly 2%, to $160 million. Through the first three quarters of the year, the company’s operating revenue was $4.6 billion, down from $4.8 billion for the first nine months of 2007.
Once the deal is finished, the newly combined company will have about 8 million telephone customers, 2 million broadband customers, and 400,000 video customers.
The purchase is CenturyTel's largest since selling shares to the public in 1968, and may pose a challenge – in part because it will bolster the company’s subscriber ranks in such economically hard-hit regions as Nevada and Florida, where foreclosure rates have jumped, Bloomberg said.
“This increases CenturyTel's exposure to some difficult economic environments like Las Vegas and Florida, markets that have been a little more hard hit than they're used to serving,” Stifel Nicolaus & Co. Inc. (SF) analyst Chris King told Bloomberg. King rates CenturyTel shares as a “Buy.”
Before the deal can close, stockholders from both companies will have to provide their approval. The merger will also have to pass muster with state and federal regulators. The companies hope to close the deal in the second quarter.
News and Related Story Notes:
CenturyTel to Buy Embarq for $5.8 Billion.
CenturyTel buying Embarq in $11.6 billion deal.
CenturyTel Agrees to Acquire Embarq for $5.8 Billion.
CenturyTel to Acquire Embarq in $5.8 Billion Deal.
Independent Telecom Analyst Jeffrey Kagan.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.