Rural telecom carrier CenturyTel (CTL), which now operates under the CenturyLink moniker, announced that it has forged a definitive agreement to acquire third-largest U.S. local-phone service operator Qwest Communications (Q) in an all-stock deal worth $10.6 billion. This represents one of the biggest mergers in U.S. telecom industry, which if consummated would unite two leading national landline phone operators.
Under the deal, CenturyTel is offering stock worth $6.02 a share for each Qwest share, representing a 15% premium over Qwest’s closing price of $5.24 on April 21, 2010. Qwest shareholders would receive 0.1664 CenturyTel shares for each share they own. Following the merger, CenturyTel shareholders would own 50.5% of the combined entity, with Qwest shareholders holding the remaining 49.5%. CenturyTel would assume $11.8 billion in Qwest debt, which takes the total deal value to $22.4 billion.
The merger makes sense as both CenturyTel and Qwest remain challenged with hemorrhaging landline voice businesses and are contending in an industry that is rapidly consolidating. Both these operators are struggling to compete with Tier-1 national carriers such as AT&T (T) and Verizon (VZ), which offers a myriad range of communication services such as fixed voice, wireless, broadband and video.
CenturyTel has emerged as one of the largest rural telecom carriers in the U.S. following its acquisition of local telephone service provider Embarq Corporation, a spin-off from Sprint Nextel (S), in July 2009 for $11.6 billion. However, the carrier continues to experience a decline in voice access lines as it contends with burgeoning competition from other service offerings (such as VoIP) from cable operators.
Denver-based Qwest provides local phone service to roughly 10.3 million customers in 14 Midwestern and western U.S. states. However, the carrier remains more challenged than the other regional telephone companies (“Baby Bells”) AT&T and Verizon, given the lack of its own wireless and satellite TV services.
This has prevented Qwest from achieving a meaningful penetration in these lucrative markets. Moreover, erosion in legacy landline business due to wireless substitution continues to weigh on the carrier’s top-line.
Both companies’ boards have approved the merger deal, which is expected to close in the first-half 2011. The merger will be accretive to CenturyTel’s free cash flow and is expected to generate cost synergies of roughly $625 million over 3−5 years following the closure of the deal. Each company plans to continue their respective dividend policy until the completion of the transaction.
The deal, which is subject to regulatory approvals, will create one of the largest national landline phone companies with nearly $20 billion in annual revenues, 17 million phone lines, 5 million broadband connections and operations across 37 states. The integrated entity will have complementary assets and geographic coverage, and will compete with greater scale and operational efficiency in a mature U.S. home-phone market.
CenturyTel’s shares fell 92 cents (or 2.54%) to $35.28 while Qwest’s shares leapt 24 cents (or 4.48%) to $5.47 in early trading today.
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