The proposed merger of Qwest Communications (Q) and CenturyLink Inc. (CTL) has been approved by the Minnesota Public Utilities Commission.
The merger was already approved by shareholders of both companies and 18 other state regulators. It has also received the antitrust clearance from the Department of Justice and the Federal Trade Commission.
Both the companies expect completion of the deal (including the pending approval of Federal Communications Commission and state regulators in Oregon and Washington) by the end of the current quarter and are planning for a closing date on April 1, 2011.
The agreement, which was signed on April 21, 2010, stated that upon completion, Qwest will become a wholly -owned subsidiary of CenturyLink. Each share of the Qwest stock will be converted into 0.1664 shares of CenturyLink common stock.
CenturyLink shareholders will own approximately 50.5% and Qwest shareholders will own about 49.5% of the combined company. The newly formed company will be headquartered in Monroe, Louisiana and will maintain a key operational presence in Denver.
Both companies will invest at least $50 million in broadband infrastructure in Minnesota over a five-year period. They currently have Fiber to the Node (FTTN) based approach to broadband. The new entity will have a total of 5.4 million broadband Digital Subscriber Line (DSL) customers. The merger will create 180,000-route-mile national fiber network, which will enable the delivery of a diverse mix of service and product offerings.
CenturyLink has emerged as one of the largest rural telecom carriers in the U.S. However, the carrier continues to experience a decline in voice access lines due to increasing competition from other service offerings (such as VoIP) by cable operators. Post acquisition, CenturyLink will gain access to Qwest’s existing customers and acquire its business network facilities.
The merger will provide Qwest shareholders substantial benefit in the form of a roughly 50% dividend hike from the current level. Moreover, significant synergies, deleveraging of the balance sheet, a strong management team and a talented employee base should boost investor confidence on the stock.
However, both CenturyLink and Qwest remain challenged by hemorrhaging landline voice businesses and are contending in an industry that is consolidating rapidly. Competition is intense for both these operators, with Tier-1 national carriers such as AT&T (T) and Verizon (VZ) offering a myriad of communication services such as fixed voice, wireless, broadband and video.
Additionally, shifting customer base from the ATM-based DSL service to IP-based VDSL2 service as Qwest focuses on developing a FTTN network could also weigh on the combined company following the completion of the merger.
We are currently maintaining our long-term Neutral recommendation on both, CenturyLink and Qwest with a Zacks #4 (Sell) and a Zacks #3 (Hold), respectively.
CENTURYTEL INC (CTL): Free Stock Analysis Report
QWEST COMM INTL (Q): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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