CenturyTel Steps Closer to Embarq

CenturyTel Crosses Final Hurdle to Acquire Embarq

The Federal Communications Commission (FCC) has reportedly approved CenturyTel Inc.’s (CTL - Analyst Report) impending acqusition of Embarq Corp. (EQ), marking the final regulatory clearance required to close the transaction (expected by the end of second quarter of 2009). At the end of May 2009, CenturyTe received regulatory approvals from all 33 U.S. states where the combined entity will operate local services.

Additionally, the companies also announced that the new entity will be called CenturyLink and will trade on the New York Stock Exchange under the symbol CTL. The merged entity will represent one the leading rural telecom carriers, with 7.5 million voice access lines and 2.1 million broadband subscribers. In October 2008, CenturyTel announced its proposed consolidation with Embarq Corporation.

As per the $11.6 billion deal terms, CenturyTel will acquire Embarq for $5.8 billion in stock and will assume $5.8 billion of Embarq's debt. Embarq shareholders will receive 1.37 shares of CenturyTel for each Embarq common share they own. On completion of the consolidation, Embarq’s shareholders will own 66% of the merged entity, while CenturyTel’s shareholders will hold the remaining 34%.

While the upcoming merger is expected to yield a number of operational benefits and cost-saving synergies (approximately $300 million), CenturyTel may face near-term integration problems while incorporating the acquired operations of Embarq. Moreover, meaningful merger related synergies are not expected before 2011, offering limited opportunity for near-term operational improvements.

The company continues to operate with limited liquidity and a highly leveraged balance sheet, which is set to be further stretched with the assumption of $5.8 billion in Embarq debt. Additionally, management’s outlook for 2009 appears weak, with expectations for lower network access and regulatory derived revenues along with sustained access-line erosion. Consequently, we maintain our Sell recommendation on CenturyTel.