CenturyTel Moves into the Major Leagues with Plans to Acquire Embarq

On October 27th CenturyTel announced 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 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.

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Cable & Wireless Acquires THUS As UK Turnaround Progresses

October 22, 2008 – THUS is now part of Cable & Wireless (C&W) after the cash offer for THUS was declared unconditional in all respects. In May 2008, C&W’s offer of 165p per share for THUS was rejected by the Board and a subsequent 180p offer per share open through the end of September 2008 was accepted by shareholders even though THUS management felt it still undervalued the company. In total, C&W has paid about GBP 329 million for THUS.

Analytical Summary

► Current Perspective: Slightly positive on Cable & Wireless’ (C&W) acquisition of THUS because this removes a key competitor to C&W in the UK and should strengthen C&W’s market position as the strongest challenger to BT, if it executes well on the integration of THUS.

► Vendor Importance: High to C&W, as the company has been active in market consolidation in the UK business telecom services segment (having acquired Energis in 2005). The added rationale behind the THUS acquisition is to strengthen C&W’s business in the UK ahead of a likely demerger of its UK (Europe, US and Asia) and international divisions (mainly focused on the Caribbean) into separate stock exchange listings. A split is expected to take effect in the first half of next year.

► Market Impact: High on the UK business telecom services market because this boosts C&W’s market share, takes out a key competitor in the managed services space and makes C&W the leading credible alternative to BT for large enterprise customers in the UK.

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BT Business Makes a Big Play for SMEs with a Free Mobile Broadband Offer

October 20, 2008 – BT Business has become the first operator in the UK to offer free mobile broadband as part of its business broadband product. Between now and December 31, 2008, BT Business Total Broadband Options ‘2’ and ’3’ will be available with an E170 USB modem (one per subscription) and a 1 GB monthly data allowance. Options ‘2’ and ‘3’ also come with 2,000 minutes of monthly WiFi usage available on BT’s 100,000 hotspots (including partnerships). BT Access Manager will allow customers to track their data usage.

Analytical Summary

► Current Perspective: Positive on BT Business’ decision to offer free mobile broadband with its ‘Business Total Broadband Options ‘2’ and ‘3,’ as it adds an eye-catching unique selling point to an already competitive SME DSL and WiFi broadband solution. Competition in the UK is tough, but BT is making good use of its deal to use Vodafone’s mobile network and the incumbent can reasonably claim to offer the most complete portfolio of SME services in the UK.

► Vendor Importance: High to BT Business, because the mobile operators are becoming increasingly strong players in the UK SME market, and BT’s decision to offer mobile broadband (GPRS/3G/HSDPA/HSUPA) as part of its existing broadband bundles gives it a clear differentiator from its DSL rivals. Furthermore, BT is making a definite statement that, although it has no proprietary mobile network, it can still compete when it comes to mobile services.

► Market Impact: High on the UK SME and mobile broadband markets, because BT is already the UK’s market leader, both through its position as incumbent and through its advanced SME portfolio, and this move has strengthened that position. UK mobile operators (e.g., Vodafone, O2, Orange and T-Mobile) should be concerned that BT is making such a strong move into the mobile sector and BT’s fixed competitors (e.g., Tiscali, Easynet Connect) should be concerned that their lack of mobile services is being further exposed. This offer is only scheduled to last until December 31, 2008, and BT’s plans after that date will be interesting.

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