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CenturyTel Gambles on Qwest Merger


The Wall Street Journal - Technology

By Nira J Sheth And Roger Cheng

April 23, 2010


CenturyTel Inc.'s $10.6 billion deal for Qwest Communications International Inc. is a big bet by the Louisiana telecommunications company that it can fight off the relentless decline in the U.S. local-phone business by getting bigger.


The two companies each lost core business last year, when CenturyTel shed 675,000 phone lines and Qwest lost 1.3 million. They are victims of the same trend: Ever since the rise of the cellphone, customers have been pulling the plug on traditional telephone lines.


That shift has forced regional telephone companies into mergers in recent years, as companies turn to scale to cut costs and enter new territories. CenturyTel, run by Chief Executive Glen F. Post III, has been one of the more aggressive acquirers, growing from a small local player into what will be the country's third-largest land-line company, if the Qwest deal is cleared by regulators.


The acquisition is also the latest step in the consolidation of the U.S. telecommunications industry since Ma Bell was broken up more than a quarter century ago. Some of those deals built AT&T Inc. and Verizon Communications Inc. into wireless-telephone powerhouses.


Both CenturyTel and Qwest, which don't have significant wireless businesses, have largely missed out on the cellular boom and been forced to squeeze out profits from slower growing businesses.

"Ultimately, this is a business that does benefit from consolidation," says Frank Louthan, an analyst at Raymond James.


CenturyTel is betting the deal will allow it to cut costs by combining large staffs and network resources. CenturyTel is targeting $575 million in savings, or about 5% of the companies' combined operating expenses of $13.2 billion.


One risk is CenturyTel will have to shoulder $11.8 billion of Qwest debt, bringing its total debt load to $22.4 billion. The two companies currently have about $2.5 billion in cash between them.


The deal also comes less than a year after CenturyTel closed its $5.8 billion acquisition of Embarq, the former land-line business of Sprint Nextel Corp., raising questions about whether Mr. Post will be able to effectively integrate two big purchases that leave his company heavily indebted.


Standard & Poor's said Thursday it will likely downgrade CenturyTel's credit ratings, now just barely investment grade, into junk if the deal is done. Moody's Investors Service affirmed the company's investment grade ratings, but did express concerns about integration and declines in the land-line business.


Qwest does bring some useful assets to CenturyTel. For one, it has greater exposure to business customers. The combination will push CenturyTel's share of revenue from businesses to 25% from 11%, said Mr. Post.


Qwest also brings a 173,000-mile fiber network, which will allow the company to deliver data traffic and other services into its territory. CenturyTel plans to expand into selling television over fiber-optic cable, much as AT&T has done with its U-Verse offering and Verizon with FiOS.


Finally, Denver-based Qwest has billions of dollars in past losses that CenturyTel can use to offset future taxes.


Those offsets are worth $1.7 billion in today's dollars, Mr. Post said.  CenturyTel is offering 0.1664 share of its stock for every Qwest share, valuing the latter at $6.02, a 15% premium to Wednesday's closing price. CenturyTel's shares fell 3.3% Thursday to $35.01. Qwest's shares rose 2.5% to



Companies in the land-line industry have little choice but to get bigger. Analysts say they need diverse operations and customer bases to weather the industry's challenges. The deal would give the combined company about 17.3 million land lines in 37 statesócompared with 31.9 million for Verizon and 46.5 million for AT&T.


"CenturyTel needs to diversify from residential voice, and this also gives them data transport," says Mr. Louthan of Raymond James. "Qwest needs more stable rural markets in addition to big city markets like Denver."


Mr. Post will serve as CEO of the combined company, which will be renamed CenturyLink and based in Monroe, La., not Qwest's hometown of Denver. The combined company will have about 48,000 workers, with about 28,000 coming from Qwest.


Mr. Post, 57 years old, is a native of northeastern Louisiana who joined the local phone company in 1976 and worked his way up. He become chief executive of CenturyTel in 1992 and took over as chairman from the company founder a decade later.


Friends and associates describe Mr. Post as a soft-spoken leader who enjoys deal making and duck hunting.


"During the winter time, [hunting] is his passion," said George Cummings, a friend and chief executive of Progressive Bank in Monroe.


Mr. Post has built CenturyTel through a series of acquisitions, buying rural phone companies and more recently taking over bigger player. In 2002, he fended off a hostile approach from Alltel Corp. by selling his company's wireless business to its rival, keeping his company independent but heavily dependent on land lines.


Talks with Qwest began several months ago, but the real negotiations occurred over the last two months, according to people familiar with the matter.


One concern was that Qwest wasn't an investment grade firm. But Qwest was viewed as doing a good job repairing its balance sheet and paying down debt, which helped make the deal possible, these people said.


Qwest officials needed to feel comfortable with its valuation on the deal and handing over the reins to

CenturyTel, which has projected its revenue will decline roughly 5% this year from $4.97 billion in 2009.


Whether unions and regulators could be won over were also considerations, but the parties felt they had a good chance of being resolved, especially considering Qwest was being bought by a financially healthier company.


The deal would be the end of the line for Qwest, the last of the so-called Baby Bells, the seven regional phone companies that can trace their roots back to the breakup of the old AT&T in 1984. The company, a fallen darling of the 1990's technology boom, was later rocked by accounting scandals a decade ago.


The telecom industry is still likely to see further consolidation, though the deals may not be as big, analysts and people in the industry say.


"I think it's a reconfirmation of the strategy we've had on consolidation," said John Killian, chief financial officer of Verizon Communications Inc., which has sold millions of its land lines in recent years. "It's consistent with the direction we're heading into."


One potential mover could be Windstream Corp., another large land-line company. In the last six months, it has committed more than $1.3 billion in stock and cash to snap up four smaller companies. Windstream declined to comment.


The door isn't shut on future acquisitions by CenturyTel, either. Mr. Post said he intends to focus on finishing wrapping Embarq and Qwest into the company over the next 12 months. "Then we'll see where we go from there," he said.


Spencer E. Ante and Joann S. Lublin contributed to this article.