Saturday, April 25, 2009

CenturyTel Gets Approval to Acquire Embarq

CenturyTel has been granted approval by Florida, Louisiana, Illinois, Georgia, Mississippi, Nebraska, Minnesota and Ohio Public Utilities Commissions to acquire all of the outstanding common stock in Embarq Corporation. The shareholders of both companies approved the stock transaction. "Eighteen of the 33 states in which the combined company will operate do not require formal approval of the merger." [moneycentral] "The transaction is valued at approximately $11,600 million, including the assumption of Embarq's $5,800 million debt." [tradingmarkets] likes CTEL stock. It reports:

Piper analyst says, "CenturyTel is merging with Embarq, creating the largest RLEC. We believe the Street is not including the $400 million in annualized run-rate synergies into estimates; we also believe the synergies are beatable. We think this could give us free cash flow upside of $0.75, or 2.0% to our free cash flow yield. We expect the merger to close in 2Q – most of the approvals have already been met. CTL is already the best FCF yielding RLEC.

"Combined, CenturyTel and EMBARQ will have approximately 7.7 million access lines, more than two million broadband customers and more than 400,000 video subscribers, based on data as of Dec. 31, 2008." [moneycentral] This will likely place them in the 3rd or 4th place below Comcast Ma and Pa Bell.

The takeover story is particularly interesting (and described in detail on WSJ Blogs). Embarq figured that the RLEC's - itself, CTEL, Windstream and Frontier - would have to combine to survive. The best 2 balance sheets and credit belonged to EMBQ and CTEL. "There was a timing consideration: Embarq had been spun off from Sprint in a tax-free deal in 2006, before the telecommunications operator’s merger with Nextel. Because of federal antitrust laws, Embarq had to wait a certain amount of time after that spinoff to consider a merger, or else shareholders and the company would have to pay heavier taxes." Because Lehman Bros. BK filing, no cash valuation was going to accurate, so CTEL proposed an all-stock deal that made the most sense in the financial setting at the time.

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