NEW YORK (Reuters) - CenturyTel Inc (CTL.N) said it will buy the Qwest Communications International Inc Q.N, in a $10.6-billion stock deal, combining the third and the fourth biggest U.S. landline phone companies to help them compete more aggressively and cut costs.
The deal comes as more consumers unplug their home phones and go wireless, leaving CenturyTel and its rivals to turn to mergers to support their long-term viability. CenturyTel, which is changing its name to CenturyLink, became the fourth biggest US telephone company when it bought Embarq last year.
The new company is expected to be called CenturyLink but use Qwest’s brand for business services. 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 tightened their belts.
“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 get 0.1664 shares of CenturyTel for each Qwest share they own. Based on CenturyTel’s closing price of $36.20 on Wednesday, this would mean about $6.02 worth of CenturyTel stock for each share.
Qwest shares closed up 2.48 percent, or 13 cents at $5.37 on Thursday after closing at $5.24 the day before. Its shares had already risen by about 24 percent since January as investors had speculated it would be bought.
CenturyTel shares, which have a market value of about $10.9 billion, ended down 3.3 percent, or $1.19, at $35.01 on the New York Stock Exchange.
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.
It compares with a multiple of 4.5 for CenturyTel’s 2009 purchase of Embarq. Qwest got a higher valuation due to its enterprise business and its eligibility for certain tax credits, King said.
CenturyTel Chief Executive Glen Post will be CEO of the combined company. He said savings from the merger would help it expand services like broadband Internet and television, putting the firm in a better position to compete against cable 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.
Post, who has worked at CenturyTel since 1976, declined comment on how many lay-offs would come as a result of the deal. Qwest has more than 30,000 workers while CenturyTel has about 20,000, according to the latest public data.
CenturyTel, which was operated out of its owners’s parlor in 1930 and was handed down as a wedding present in 1946, has made a steady stream of acquisitions since Post became CEO in 1992. But the Qwest and Embarq deals were Post’s biggest yet.
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 and was also hit by accounting scandals involving then CEO Joseph Nacchio..
Qwest started as a subsidiary of the Anschultz company. It changed its name from Southern Pacific Telecom to Qwest in 1995 and became a publicly traded company in 1997.
Now the merged company will have customers in 37 states and about 17 million access lines if the deal is approved. However, it will still be much smaller than rivals such as AT&T Inc (T.N), which has more than 26 million phone customers.
Several analysts said they expect regulators to approve the deal, which is expected to be completed next year. Antitrust expert Evan Stewart of law firm Zuckerman Spaeder LLP expects the deal to pass muster after close regulatory scrutiny.
Some analysts say phone companies like CenturyLink also need to operate cellphone services to help keep customers loyal. To this end, Qwest resells Verizon Wireless’ service.
Post said he has no plans to build a wireless network but sees the combined company being in a better position to negotiate an economical deal with a wireless operator to resell wireless services, than the companies could 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. CenturyTel had about $7.7 billion debt at the end of 2009.
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.
Qwest would be the latest in a group of major Colorado companies to move headquarters from the state if the deal succeeds. Another, Frontier Airlines, was also acquired.
Barclays Capital, Evercore Partners, and J.P. Morgan were financial advisers to CenturyLink. Lazard, Deutsche Bank, Morgan Stanley and Perella Weinberg Partners advised Qwest.
Additional reporting by John Tilak in Bangalore, Diane Bartz in Washington D.C and Keith Choffman in Denver; Editing by Derek Caney, Tiffany Wu and Bernard Orr