Qwest Says Yes to CenturyLink Acquisition Bid

Event Summary

April 22, 2010 -- Qwest has agreed to be acquired by CenturyLink in an all-stock transaction valued at $22.4 billion, including an assumption of $11.8 billion of Qwest debt. CenturyLink investors will hold 50.5% of the company, while Qwest investors will hold 49.5%. The combined company expects to save $625 million annually in capital investment and operating costs, starting three to five years after the close of the merger and after one-time $650-$800 million operating and $150-$200 million capital costs for integration. The combined company will have both a national network and local market presence in 37 states.

Quick Take

Analytical Summary

• Current Perspective: Moderate to Qwest, because CenturyLink has relatively little to contribute to Qwest's enterprise-focused Business Markets Group. The companies can afford to take their time merging, as there are no immediate financial pressures. CenturyLink's plans to save $625 million annually ($575 million of it from operational costs) seem steep, but operating costs have been declining as traditional wireline revenues erode; depending on how it is accounted, the reductions are readily achievable. Enterprise operations have been holding revenues steady, and they should not carry the brunt of any cuts.

• Vendor Importance: Very high to CenturyLink and Qwest, because the combination will greatly build up the third-largest U.S. incumbent local carrier after AT&T and Verizon. Following the merger, Qwest can extend its more comprehensive mid-market/enterprise services to customers located in CenturyLink incumbent local carrier territory, particularly in Las Vegas, the gem in CenturyLink's crown.

• Market Impact: High on business services market, because the combined entity can use Qwest's portfolio of enterprise services to hunt for customer win-back/cross-sell/up-sell opportunities in CenturyLink's ILEC territories in Las Vegas and elsewhere. CenturyLink might help Qwest in turn by encouraging new directions in investment, though CenturyLink will have relatively little to contribute to Qwest on the business services product development front. Finally, some competitors may also consider a counter-offer to CenturyLink's all-stock transaction, on the basis of Qwest's range of assets and self-sustaining profitability

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Competitive Strengths and Weaknesses

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Analytical Perspective

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