CenturyLink’s (CTL) pending acquisition of the third largest U.S. local-phone service operator, Qwest Communications (Q), received approval from shareholders of both the companies. The acquisition was announced on April 22.
 
Following shareholders’ approval, the transaction received clearance from the U.S. Department of Justice and the seven state regulatory utility commissions. The transaction is still pending approval in 14 other states, the District of Columbia and at the Federal Communications Commission. The acquisition is expected to be completed in the first half of 2011.
 
Upon completion of the transaction, Qwest will become a wholly owned subsidiary of CenturyLink, and each share of 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 combined company will be headquartered in Monroe and will maintain a key operational presence in Denver.
 
Both CenturyLink and Qwest remain challenged with 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.  
 
CenturyLink 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 due to increasing competition from other service offerings (such as VoIP) by cable operators.
 
Denver-based Qwest provides local phone service to roughly 10.3 million customers in 14 mid-western and western U.S. states. However, the carrier remains more challenged than the other regional Baby Bells 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.
 
Consequently, if the deal is consummated, it will represent one of the biggest mergers in the U.S. telecom industry and will create one of the largest landline operators, with nearly $20 billion in annual revenues, 17 million phone lines, 5 million broadband connections and operations across 37 states. The merger will be accretive to CenturyLink’s free cash flow and is expected to generate cost synergies of roughly $625 million over 3−5 years pursuant to the closure of the deal.
 
We are currently maintaining our Neutral rating with Zacks #3 (Hold) Rank.
 
CENTURYTEL INC (CTL): Free Stock Analysis Report
 
QWEST COMM INTL (Q): Free Stock Analysis Report
 
SPRINT NEXTEL (S): Free Stock Analysis Report
 
AT&T INC (T): Free Stock Analysis Report
 
VERIZON COMM (VZ): Free Stock Analysis Report
 
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