The pending merger between Qwest Communications (Q) and CenturyLink Inc. (CTL) recently received approval from Federal Communications Commission (FCC). The consent followed the companies’ approval of certain terms and conditions that were set by the FCC.
The FCC has ensured that the merged company will consider public interest and provide consumer benefits such as broadband access to 2 to 2.3 million low-income customers for less than $10 a month and computers for less than $150. Further, the newly formed company will increase the present network capacity of both companies to at least 4 megabits per second. The increased broadband speed will be made available to 4 million more customers, while speeds of 12 megabits and 40 megabits per second will be provided to double and triple the present numbers, respectively.
The merger was already approved by shareholders of both companies and 20 other state regulators. It is expected to be completed by April 1, including the only pending regulatory approval from Oregon.
The agreement, which was signed on April 21, 2010, stated that CenturyLink will acquire Qwest for $22 billion including $10 million of stock swap. Upon the completion of the merger, Qwest will operate as a wholly owned subsidiary of CenturyLink. Qwest shareholders will own about 49.5% and CenturyLink shareholders will own approximately 50.5% of the combined company.
Qwest remains the third-largest U.S. landline phone company, followed by CenturyLink in the fourth position. Currently, CenturyLink has an approximately 2.4 million broadband customer base, 6.5 million access lines and around 628,000 satellite video subscribers. Qwest caters to approximately 2.9 million broadband customers, 8.9 million access lines, more than 1 million video subscribers and 1 million wireless customers.
Both companies will invest at least $50 million in broadband infrastructure in Minnesota over a five-year period. They currently have a 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 an 180,000-route-mile national fiber network, which will enable the delivery of a mix of diverse service and product offerings.
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 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, a 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.
We are currently maintaining our long-term Neutral recommendation on both CenturyLink and Qwest with Zacks Rank #4 (Sell) and Zacks Rank #3 (Hold), respectively.
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