WASHINGTON – CenturyTel Inc. on Thursday said it will buy Qwest Communications International Inc. for $10.6 billion in stock, making it the third-largest provider of traditional local-phone service in the United States.
The proposed merger is a latest in a series of deals that have consolidated a splintered local-phone industry. The landline business has been shrinking for years as customers switch to cable phone service or rely entirely on wireless, forcing local carriers to bulk up to avoid a slow death.
The combined company would have annual revenue topping $19 billion and would provide service in nearly 40 states, with 17 million phone connections, 5 million broadband customers and 1.4 million video customers.
CenturyTel, once a sleepy rural company based in Louisiana, has been especially aggressive, snapping up the former local business of Sprint Nextel Corp. last year.
The move to acquire Denver-based Qwest would make CenturyTel the third-largest local carrier in the country, not far behind AT&T Inc. and Verizon Communications Inc.
Qwest, a former stock market darling, has been looking to sell part or all of its business for some time. The company also was weakened by the collapse of the Internet boom at the turn of the century, and by an ensuing financial scandal that led to the ouster of senior management. Growth in recent years has been slow or nonexistent.
“Everyone was expecting Qwest to sell out at some point,” said analyst Todd Rethemeier of Hudson Research, who called the purchase price reasonable. “Neither side is getting a bargain, and neither side is getting a bad deal either.”
The deal values Qwest at $6.02 a share and represents a 15 percent premium above Qwest’s closing price on Wednesday.
The ultimate source of Qwest’s demise as an independent company was its decision in the 1990s not to build a wireless network. That huge strategic blunder cost Qwest a chance to participate in the fastest growing telecommunications market, a lifesaver for the phone industry.
In a conference call, CenturyTel Chief Executive Glen Post III said wireless needs to be part of the company’s future strategy, though he did not offer specifics. “As far as the wireless strategy, it’s too early for us to be talking about what we may or may not do there,” he said.
Some analysts have suggested CenturyTel eventually might buy an existing mobile operator. “They have to look at their deficiencies, which certainly includes wireless,” said Mike Jude, who covers the consumer telecommunications industry at research firm Frost & Sullivan.
In the meantime, the company’s local-phone business will continue to shrink, though probably at a lower pace. CenturyTel has prospered by tight cost controls and the expansion of broadband service, enabling it to generate gobs of cash and support a generous 8 percent dividend yield. Qwest’s dividend yields almost 6 percent.
“It’s a declining business, but it’s not going to zero,” Hudson’s Rethemeier said. “There is plenty of cash flow to support the dividend.”
Under the agreement, CenturyTel would swap 0.1664 of its shares for each share of Qwest. CenturyTel stockholders would own 50.5 percent of the combined company and Qwest investors 49.5 percent, marking the deal as a rare “merger of equals.”
At the same time, CenturyTel will assume $11.8 billion in Qwest debt.
CenturyTel said it expects the acquisition to boost its free cash flow, minus integration costs, immediately after the combination is complete. The new company would also generate up to $625 million in annual savings by combining operations, CenturyTel said.
Post would remain chief executive of CenturyTel while Qwest Chief Executive Edward Mueller is slated to become a member of its board. CenturyTel plans to maintain its headquarters in Monroe, La., but will also have a “key operational presence” in Denver.