CenturyTel to acquire Embarq in $5.8 billion deal

EMBARQ executives and employees ring the opening bell of the New York Stock Exchange in a 2007 photo.

NEW YORK (Reuters) - Rural telephone company CenturyTel Inc plans to buy bigger operator Embarq Corp for $5.8 billion in stock in an effort to cut costs and stay competitive as traditional phone lines decline.

Analysts said the deal would spark more consolidation in the rural telecom space as consumers increasingly switch to wireless and cable services for phone services, leaving acquisitions as the best way for network operators to grow.

Under the deal, shareholders of Embarq -- the biggest U.S. rural service -- will receive 1.37 shares in CenturyTel for each Embarq share they own, the companies said on Monday. This is equivalent to $40.42 of CenturyTel stock for each Embarq share, or 36 percent above Embarq's Friday closing price.

Centurytel, which will also assume $5.8 billion Embarq debt, saw its shares fell 13 percent. Embarq's rose 4 percent.

Stanford Group analyst Michael Nelfon said the deal was good for both companies as it will allow them to return more cash to shareholders as dividends and buybacks, which investors see as the main attraction to investing in traditional operators.

"Most importantly the deal should be accretive to free cash flow per share, the most important metric for the rural carriers," he said. Free cash flow is earnings after capital spending costs but before depreciation and amortization.

CenturyTel said it expects related savings and revenue benefits of about $400 million within the first three years and sees the deal boosting free cash flow per share in 2010, the first full year after the expected second-quarter close.

It said the savings will come from reduction of corporate overhead and elimination of duplicate functions, new revenue opportunities and increased operational efficiencies but did not give specific details of layoff plans.

CenturyTel Chief Executive Glen Post said the deal gives it a new set of customers as well as a way to cut costs.

"It improves our competitive positioning as a company. It lowers our costs," Post said in an interview with Reuters. "It improves the mix of our customer base, especially with Embarq's business and enterprise customer base."

CenturyTel temporarily suspended its current share repurchase program pending completion of the transaction, but it said it expects buy back some shares and continue its current dividend policy after the deal closes .

NEXT DEALS

Credit Suisse analyst Chris Larsen said the deal would likely kick off a long-expected round of consolidation among rural phone companies with potential deals including a purchase by Windstream Corp, the second biggest rural provider, of smaller operator Frontier Communications Corp.

"We think a Windstream/Frontier transaction is the next most logical," he said in a research note. Consolidated Communications is also seen as a potential target.

Centurytel may also look at doing more deals within in a year, if there are more opportunities in the carrier or technology services space, Post said.

The combined Embarq-CenturyTel would operate in 33 states and have about 8 million access lines, 2 million high-speed Internet customers and about 400,000 video subscribers.

Monroe, Louisiana-based CenturyTel paid about 7.9 times projected 2009 earnings for Embarq, the former wireline telephone business of Sprint Nextel.

Overland Park, Kansas-based Embarq trades for 5.6 times projected 2009 earnings, below the average value of 8.8 times for its peers, according to Reuters data.

On closing, Embarq shareholders are expected to own about 66 percent of the combined company, which will be based in Monroe, Louisiana, and would have had combined revenue of $8.8 billion as of September 30.

The name of the new company will be decided before the deal closes. CenturyTel's Post will serve as CEO of the combined company, while Tom Gerke, Embarq's chief executive, will serve as executive vice-chairman of the board, the companies said.

Separately, Embarq posted a third quarter profit of $160 million, or $1.11 a share, from $157 million, or $1.01 a share, a year earlier. Before items associated with a work force reduction, earnings per share were $1.40, beating Wall Street consensus estimates of $1.30, according to Reuters Estimates.

CenturyTel's quarterly profit fell to $84.7 million, or 84 cents per share, from $113.2 million, or $1.01 a share, a year before, with revenue declining 8 percent.

Its profit before special items was 82 cents a share, compared with analyst estimates of 83 cents a share.

Shares of Embarq, which have fallen about 46 percent over the past year, rose $1.45, or almost 5 percent, to $31.19 on New York Stock Exchange after the news. Shares of CenturyTel, the third biggest rural provider, fell 12 percent to $26.06.

(Reporting by Franklin Paul, Ritsuko Ando and Sinead Carew in

New York and Jessica Hall in Philadelphia; Editing by Derek Caney and Peter Galloway)