RCR Wireless News reports that the board of directors of CenturyTel, one of the largest rural telephone companies, has given the company a green light to acquire larger competitor Embarq, in a projected $11.6 billion transaction. CenturyTel will also acquire $5.8 billion of Embarq’s debt.
It is one of the first significant nonfinancial mergers since the onset of the recent market turbulence, reports the NY Times. If the deal goes through, Embarq shareholders would own 66% of the combined company, while CenturyTel would own 34%.
Together, the two communications companies cover 33 states, around 8 million access lines, 2 million broadband customers and 400,000 video customers, says RCR News. If the two join forces, the combined pro forma revenue is expected to reach near $9 billion and the transaction is predicted to bring in $400 million a year during the first three years of operation.
Embarq is much bigger than CenturyTel in terms of local phone connections (Embarq has 5.85 million connections vs. 2.04 million for CenturyTel), but CenturyTel is the one paying a 36% premium to Embarq’s Friday closing stock price.
Embarq runs the original landline services of Sprint Nextel and hired JPMorgan Chase and put itself up for sale at the worst possible time, September, amid the financial crisis, which made deal financing virtually unobtainable, so CenturyTel decided to make an all-stock bid.
CenturyTel and Embarq, like other land line phone companies, have offset their wireline declines by signing up more high-speed Internet customers. Unlike AT&T and Verizon, however, CenturyTel and Embarq do not own wireless networks. Landline carriers have been forced to cut costs and wring greater efficiency out of their existing operations.
Because of federal antitrust laws, Embarq had to wait a certain amount of time after their Sprint spinoff or else the company would have to pay heavier taxes. The transaction is subject to regulatory approval and both companies expect the deal to close during the second quarter of 2009.
Next week the FCC may change the rates phone companies pay one another to transfer calls. As it stands now, the system presents a multibillion-dollar revenue stream that flows in and out of phone companies across the country. Rural phone companies will be hit the hardest under the plan because they currently receive millions from AT&T and Verizon for phone calls that transfer through their network. Embarq could lose 18% of its free cash flow, according to Raymond James analyst Frank Louthan.
CenturyTel sold its wireless unit to Alltel. Now both CenturyTel and Embarq are positioned to cut deals with Bell companies–and each other. Don’t forget the 700 MHz “D Block” spectrum is going on the block next year.
Meanwhile, Alltel, the fifth largest wireless telecommunications company in the United States, with 13.4 million customers, as of the second quarter 2008, may be bought by Verizon. The National Telecommunications Cooperative Association represents some of the smallest U.S. telcos.
