Windstream-Frontier seen as next rural telecom deal

By Sinead Carew

NEW YORK (Reuters) - Rural America may be the next hot spot for telecommunications mergers and Windstream Corp (WIN.N) may be the first to pull the trigger with a bid to buy Frontier Communications Corp (FTR.N).

Rural phone service providers need to consolidate to cut costs and boost earnings, as home phone lines continue to decline with consumers switching to services provided by wireless and cable companies.

Windstream, the second-largest rural operator by revenue, said this month it hoped to participate in consolidation, fueling speculation that it was on the hunt for deals.

The largest rural phone company Embarq Corp (EQ.N), No. 3 player CenturyTel Inc (CTL.N), as well as smaller operators Consolidated Communications Holdings Inc (CNSL.O) and Iowa Telecommunications Services Inc (IWA.N), could also take part on a wave of deal-making, analysts said.

"The most likely takeout candidate for Windstream would be Frontier because of Frontier's size," said Stanford Group analyst Michael Nelson. "They're really the only one that would move the needle significantly."

Fourth-ranked Frontier, based in Stamford, Connecticut, has a market value of about $4 billion and more than 2.3 million access lines. Windstream, created by merging Valor Communications Group Inc and Alltel Corp's wired business, is worth $5.6 billion and has over 3 million access lines.

Nelson sees a Frontier deal in about six months, costing Windstream $9 billion, including the assumption of about $4.6 billion in debt. He said it would provide enough savings to boost Windstream's earnings the year after a deal.

Big deals that maximize cost savings would make sense for Windstream, according to Jefferies analyst Jonathan Levine, who said closing even small deals require a lot of money and time as they involve reviews from the regulators of each state where the target companies have operations.

"I think they're going to probably look at some of the larger players," said Levine.

RELUCTANCE TO SELL

CenturyTel, with about 2.1 million access lines and a market value of over $3.9 billion, may be an attractive target for Windstream but analysts noted that it has shown a preference to stay independent and do its own acquisitions.

Monroe, Louisiana-based CenturyTel is expected to try itself to buy companies such as Iowa Telecom or Consolidated Communications.

Stanford's Nelson said Iowa Telecom, whose market value is about $568.3 million, may cost as much as $830 million. He noted that CenturyTel could also spark a bidding war for Frontier. Consolidated's market capitalization is about $448 million.

CenturyTel said that its strategy has been to make acquisitions but declined to reveal plans. Windstream and Frontier were not immediately available for comment.

Of the four top operators, Embarq, a spin-off from Sprint Nextel Corp (S.N), is the least likely to look for an acquisition, said analysts who think it has most room to improve its earnings by cutting costs without having to merge.