Embarq CEO says well positioned for acquisitions

By Ritsuko Ando

NEW YORK (Reuters) - Rural telecommunications carrier Embarq Corp. EQ.N sees the sector on the verge of consolidation and believes the company is well-positioned to be an acquirer in the future, its chief executive said on Friday.

Embarq CEO Daniel Hesse said buying an additional rural phone carrier would help it slash costs, although he did not yet see specific deals in which such benefits outweighed premiums it would likely have to pay.

"Today you have roughly 800 local exchange carriers in the U.S., and we're competing with much larger competitors -- the wireless companies, the cable companies," Hesse told Reuters in an interview.

"We're very well positioned to be an acquirer," he said. "But in today's market, a lot of the prices are too high. And we have a very disciplined approach to looking at acquisitions."

Embarq was spun off last year from Sprint Nextel Corp. (S.N), which now focuses on wireless service. Embarq shares have risen over 20 percent since a May 2006 market debut.

Hesse, who was CEO of AT&T Wireless Services from 1997 to 2000, said further gains in the stock could help a deal.

"The stock has moved up a lot in the past year, not only in absolute terms but relative to the industry. If we continue to perform that well, then all of a sudden our equity can become a currency," he said.

Embarq offers local and long-distance phone services as well as high-speed Internet access in 18 states. It and other phone carriers face increasing competition from cable and wireless companies.

The strongest telecoms companies, AT&T Inc. (T.N) and Verizon Communications Inc. (VZ.N), have grown through massive acquisitions over the past year.

Those top two carriers now also offer wireless, Internet, and advanced video services to better compete with cable operators as traditional phone subscriptions decline.

Embarq has forecast access line subscription cancellations in the mid-to-high 6 percent range in 2007. Analysts say such declines, a trend seen across the telecoms industry, could lead to consolidation ahead.

Outside the landline business, rural wireless carrier Alltel Corp. AT.N accepted last month a $25 billion private equity buyout. Analysts have said the move would likely be followed by more deals in the wider telecoms industry.

Hesse said local carriers may also appear attractive to private equity firms due to the companies' steady cash flow but regulatory restrictions may hinder bids.

"If there was not the high level of regulation this would be very attractive to them," he said. "But with or without private equity, consolidation will come."

Embarq's first-quarter profit per share was $1.25, beating analysts' forecasts. It also raised its second-quarter dividend to 62.5 cents per share from a previous 50 cents.

Hesse said Embarq had not yet decided what to do with its cash in the future, such as paying a higher dividend, buying back its shares, or spending on an acquisition.

He also said the prospect of higher U.S. interest rates made it even more important for the company to keep an eye on its balance sheet and remain investment grade.

Embarq is testing an advanced video product, similar to AT&T's Internet protocol television (IPTV) service called U-Verse, but will wait to deploy it due to high costs.

Embarq will monitor progress by AT&T and Verizon and wait for prices of IPTV-related equipment to come down, Hesse said.

"When you buy that big screen, flat panel television you're better off buying it two years later when it's cheaper. It's the same thing," he said.