October 27, 2008 Telecom Web

Landline carrier CenturyTel is buying Embarq, the former landline unit of troubled wireless carrier Sprint Nextel, in a $5.8 billion all-stock deal that will see current Sprint shareholders winding up with 66 percent of the equity in the combined company. The deal might be seen as a merger or, perhaps, as a reverse takeover, but no matter how it’s cast, the move appears to be a desperate play for salvation by both companies in the face of the faltering landline market. Embarq, for instance, is sitting on $5.8 billion in debt, while CenturyTel this morning reported a continuing hemorrhage of landline customers. And the two said they haven’t even decided what name to use once their deal closes. With Embarq’s debt factored in, the deal has an enterprise value of approximately $11.6 billion. The terms, which will see Embarq shareholders receive 1.37 CenturyTel shares for each of their Embarq shares, is a premium of 36 percent over Embarq’s closing stock price Oct. 24. That quickly turned into a meaningless calculation, though, as CenturyTel shares plunged in trading this morning, while Embarq shares were up far less than the 36-percent premium it’s being paid. As expected, the two carriers are painting the deal in the best of possible lights as “creating one of the leading communications companies in the United States.” They have a combined operating presence in 33 states, with approximately eight million access lines and two million broadband customers. The combo is expected to have pro forma revenue in excess of $8.8 billion and a pro forma EBITDA of approximately $4.2 billion. No bottom-line profit predictions have been made. More saliently, the two outlined the possibility of saving $400 million per year in “synergy opportunities.” Carefully avoiding the terms “layoff” or “reduction in staff,” CenturyTel and Embarq describe those synergies as a “reduction of corporate overhead, elimination of duplicate functions, enhanced revenue opportunities and increased operational efficiencies through the adoption of best practices and capabilities from each company.” Embarq is no stranger to staff reductions in its brief history since spinning out of Sprint Nextel (TelecomWeb news break, May 18, 2006). More than 10 percent of the staff at that time is gone. Most recently, 210 of its call-center employees were pink-slipped, and the 256-person staff who ran its phone network was transferred to Nokia Siemens Networks (NSN) as part of a deal under which NSN now is running Embarq’s network (TelecomWeb news break, Sept. 15).  Despite the fact Embarq shareholders will hold the majority of shares in the combined carriers, CenturyTel clearly will be the dominant force in the deal – despite the fact that, in its most recent financial report released this morning, CenturyTel reported a horrid third quarter, with sales off 8.2 percent to $650,073; and profits down 23.5 percent $82,760 as the number of landline subscribers fell 6 percent year over year to only a few more than 2 million. The only saving grace was a 18.5-percent increase in broadband subscribers, to 628,000. The combined company’s board will consist of eight current CenturyTel board members and seven members from the current Embarq board. Even more saliently, the company will be headquartered in Monroe, La. As for Embarq’s current digs in Overland Park, Kansas, the two pledge a “significant presence” will remain. CenturyTel Chairman and CEO Glen Post will be CEO of the combined company. William Owens, currently non-executive chairman of the Embarq board, will be the non-executive chairman of the combined company. Embarq CEO Tom Gerke becomes executive vice-chairman of the board, which indicates he apparently no longer will have a day-to-day direct operating role. The deal obviously needs the standard pile of regulatory and other approvals, and the two telcos anticipate a closing in the second quarter of 2009.

Did you know?
1951 - Direct dial service is first available coast to coast.
1987 - The U.S. reached it’s one millionth cellular subscriber.
Today it is 260 million.
1989 - FTTH trials begin in Cerritos, California
1992 - The World Wide Web is born - The brain child of CERN physicist Tim Berners-Lee

November Trivia-
1860 - Abraham Lincoln elected President of the United States.
1889 - Montana became the 41st state.
1925 - The “Grand Ole Opry” debuts on radio.
1963 - John F. Kennedy assassinated in Dallas, Texas