CenturyTel Moves into the Major Leagues with Plans to Acquire Embarq

| Oct 29, 2008 | Business Network Services - U.S. | Competitive Intelligence Report

| Analyst: Cindy Whelan

Current Perspective: Positive/Neutral
Vendor Importance: High
Market Impact: Moderate

Event Summary

October 27, 2008 – CenturyTel announces plans to acquire Embarq Corporation for an all-stock transaction valued at $11.6 billion: $5.8 billion in stock and the assumption of $5.8 billion of Embarq’s debt. The companies anticipate that the merger will be accretive to 2010 free cash flow in the first full year of operation and will generate around $400 million in annual synergy within the first three years of operation. The combined company will have an operating presence in 33 states, with approximately 8 million access lines and 2 million broadband customers. The merger is expected to close in Q2 2009 following approvals by the Department of Justice, the FCC, state regulatory agencies and shareholders.

Analytical Summary

• Current Perspective: Slightly positive on CenturyTel’s plans to acquire Embarq because the merger, once approved, will combine two profitable companies that share a focus on rural and semi-rural markets. The $11.6 billion deal, which includes the assumption of $5.8 billion of Embarq’s long term debt, is structured as an all-stock transaction, potentially eliminating the need for CenturyTel to obtain additional financing in today’s extremely tight capital markets. The combined carrier will have approximately 8 million access lines, and will gain economies of scale that will allow it to reduce expenses by eliminating duplicate functions.

• Vendor Importance: High to CenturyTel, because completion of the acquisition will provide a significant boost to the carrier’s network coverage, business service portfolio and annual revenue. Both carriers are battling slow but steady access line losses and have top-line revenues that are flat or declining. Combining forces will allow the merged carrier potentially to generate significant cost savings, drive revenue by expanding growth services to a broader base of customers, and leverage its combined portfolio and resources to defend its markets against increasing competition from cable operators.

• Market Impact: Moderate on the business services market, because these carriers are focused on rural and suburban regions, areas where competition is relatively low: While the combined company may enjoy a stronger competitive position against encroaching cable operators, the merger creates a company that can increase revenue from growth services in order to outpace the decline in voice and network access service revenue. Business customers could benefit from more innovation or broader availability of advanced services, but it could also mean less flexibility on price. On a larger scale, the merger might be an indication that in spite of difficult economic times, or maybe because of them, carrier consolidation is not out of the question and there may be more consolidation in the near future.

Current Perspective

Competitive Positives and Concerns

Recommeneded Vendor Actions

| Client access - Full report in Business Network Services - U.S. | More information

Recommended Competitor Actions

• Cable companies operating in both Embarq and CenturyTel local territories need to turn up voice services and launch “triple play” business bundles of voice, video, and Internet access if they have not already done so. The sooner this is done, the better, because both merging telcos are already reselling satellite TV via DISH Network across its local service areas.

• Competitors in Embarq’s markets can imply that the company is unstable and that business services may suffer under the new ownership. Embarq was spun off from Sprint in 2006. Two years later, the carrier has been shopping itself out for acquisition. CenturyTel is much smaller than Embarq, and does not offer the breadth of business services that Embarq offers, competitors can hint that development in the new company will be directed towards consumer video and entertainment products rather than on building up its business portfolio.

• Telco competitors, who may also be wholesale access customers, can consider lobbying for regulatory treatment of the entire CenturyTel-Embarq territory as a single entity. This move would require the combined carrier to negotiate a single contract for customers that require services across the merged footprint.

• CLECs, ISPs and resellers operating in CenturyTel or Embarq regions do not need to take immediate action. Because the combined carrier’s focus is primarily on rural and suburban regions, these companies should experience little in the way of positive or negative effects.

Recommended End User Actions

• Embarq customers do not need to take immediate action. The carriers must receive approvals from federal and state regulatory authorities as well as shareholders, and this is not expected to be completed until sometime in Q2 2009. Customers with contracts scheduled for renewal before June 2009 will want to ensure that their contract terms and pricing cannot be changed once the merger goes through.

• CenturyTel customers also do not need to take action at this time. If the merger goes through, these customers will want to contact their sales representative to understand what, if any, new service options might be available to them.

CLIENTS ONLY

| Client access - Full report in Business Network Services - U.S. | More information

Top