By Franklin Paul and Sinead Carew
NEW YORK (Reuters) - CenturyTel Inc
The deal comes as more consumers unplug their home phones and go wireless, leaving CenturyTel and its rivals to turn to mergers to help their long-term viability. CenturyTel, which is changing its name to CenturyLink, became the largest U.S. rural operator when it bought Embarq last year.
CenturyTel offered a 15 percent premium to Qwest's market price, and expects the acquisition to add to free cash flow right away, estimating savings of about $625 million over three to five years.
But some analysts said it might be tough to cut more costs from Qwest, which has lost landline subscribers as the economy weakened and consumers disconnected home phones.
"Qwest has cut its operations to the bone and continues to lose lines," said Donna Jaegers, an analyst at D.A Davidson & Co. "So this will be a big challenge for Century to see if they can turn things around at Qwest."
Under the deal, Qwest shareholders will receive 0.1664 share of rural phone company CenturyTel for each share of Qwest common stock they own.
Based on CenturyTel's closing price of $36.20 on Wednesday, Qwest shareholders would receive an equivalent of $6.02 of CenturyTel stock, a premium of about 15 percent over Qwest's closing stock price of $5.24.
CenturyTel shares, which have a market value of about $10.9 billion, were down 2.46 percent, or 89 cents, at $35.31 in early afternoon trading on the New York Stock Exchange. Qwest shares were up 4.77 percent, or 25 cents at $5.49.
Stifel Nicolaus analyst Christopher King said the deal values Qwest at roughly 5.2 times his forecast for earnings before interest, taxes, depreciation and amortization this year.
This compares with a multiple of 4.5 for CenturyTel's 2009 purchase of Embarq. Qwest deserves a higher valuation because of its enterprise business and its eligibility for certain tax credits, he said.
CenturyTel Chief Executive Glen Post will be CEO of the combined company. He said savings from the merger would help it expand advanced services such as broadband Internet and television, putting the combined company in a better position to compete against cable industry rivals.
"It helps secure our future in terms of being able to compete long term in this industry," Post told Reuters.
He also said that adding Qwest's network and expertise in business services to CenturyTel's network would help the new company attract corporate customers.
REGULATORY SCRUTINY
Qwest, based in Denver, Colorado, was a high-flyer in the early dot-com era. Like many telecom companies at the time, it spent billions of dollars laying miles of fiber optic cable in anticipation of heavy Internet traffic.
It was subsequently crushed when it became apparent that this demand was not materializing. Qwest was also hit by accounting scandals involving then CEO Joseph Nacchio.
The merged company will have customers in 37 states and about 17 million access lines, but will still be much smaller than rivals such as AT&T Inc
Antitrust expert Evan Stewart of law firm Zuckerman Spaeder LLP said the acquisition is likely to be closely scrutinized by U.S. competition regulators but will likely pass muster since the telecommunications industry has already seen a lot of consolidation.
Some analysts argue that traditional phone companies also need cellphone services to hold onto customers. To this end, Qwest resells Verizon Wireless' service.
Post said the combined company may be in a better position to negotiate an economical deal with a wireless operator to resell wireless services, than the companies would separately.
CenturyTel said the transaction reflects an enterprise value of Qwest of about $22.4 billion, including the assumption of $11.8 billion of Qwest's net debt outstanding.
After the deal closes, CenturyTel's board will add four members from the current Qwest board, including Qwest CEO Edward Mueller. The company will be headquartered in Monroe, Louisiana, but it will keep a regional headquarters in Denver.
Barclays Capital, Evercore Partners, and J.P. Morgan acted as financial advisers to CenturyLink. Lazard, Deutsche Bank, Morgan Stanley and Perella Weinberg Partners were financial advisers to Qwest.
(Reporting by Franklin Paul and Sinead Carew, additional reporting by John Tilak; Editing by Derek Caney and Tiffany Wu)
