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Century Tel Embarks On Wider Path

Posted: Jun 23, 2009 09:59 AM by Greg Sushinsky

Tickers in this Article: C, S, TWC, CTL, EQ, FTR, VZ, LVLT, T, TWX

With regional telecom company Century Tel's (NYSE: CTL) deal with Embarq (NYSE: EQ) now in its final stages of approval, Century Tel is now moving to integrate the larger Embarq. The acquisition of the rural landline-based Embarq makes Century Tel larger, but will it make Century Tel better?

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A Fluid Business
Century Tel, once a small, rural carrier in the south, expanded through acquisitions to have a presence in 25 states. It has a $3 billion market cap, yet bought the $6 billion market cap sized Embarq, also a largely rural telecom company. Embarq, which was once spun off from Sprint Nextel (NYSE: S), will give Century Tel a presence in 33 states, reinforcing its regional approach. Frontier Communications (NYSE: FTR), a rural telecom in the east, failed in its bid for Embarq but was able to pick up some rural lines from telecom giant Verizon (NYSE: VZ), as telecoms both large and small are continually repositioning themselves with the gaining and shedding of properties. Speculation now centers on the possibility of Sprint Nextel disposing of a large portion of its traditional lines if it consolidates with Level 3 Communications (Nasdaq: LVLT).

Needed Size Upgrade
The array of products and competitive considerations for telecom businesses, which was a straightforward regulated monopoly decades ago, present a dizzying challenge today. There are bundled services of land lines and mobile phones, as well as the necessary expansion beyond voice and data onto the internet and TV/video, as broadband competes with cable TV. Century Tel, like its much larger cousins AT&T (NYSE: T) and Verizon, has gradually morphed from an old-fashioned landline company into these areas. Picking up Embarq does not just mean that there will be added subscriber lines, there will also be the additional services that Embarq offers. Embarq's recent mediocre first-quarter earnings report might disguise the appeal of a robust cash flow and the lure of value-added services, yet Century Tel needs these synergies to fight the larger telecoms and cable players such as Time Warner (NYSE: TWX) / Time Warner Cable (NYSE: TWC). (For more, see Dial Up Choice Telecom Stocks.)

Mixed Opinions
The acquisition of Embarq gives Century Tel - re-christened Century Link for its post-acquisition identity - added resources and the challenge of increasing earnings, as recently, Century Tel's earnings have been essentially flat while Embarq's have been slightly down. Despite a recent upgrade on Century Tel in a note from Citi (NYSE: C), the professional investment community is divided on the wisdom of the acquisition. Some reports cite Embarq's debt load as a possible problem, and others propose that cost savings will be tough to develop with the new combined company. Others see the deal as a subscriber deal, but there are always FCC regulation that can potentially imperil revenue. While that concern can be a financial bogeyman, there is also the contention that the smaller Century Tel will have trouble integrating the much larger Embarq into one cohesive company.

The Lines are Half-Full
Though the concerns about the difficulties going forward are legitimate, critics ignore some important points. Century Tel has been an extremely well-run telecom for years and has significant experience in its market. Though it is a "second-tier" telecom by size, it has already been going up against the major players such as Time-Warner in the Ohio markets, and holding its own in the fight for customers. This is significant, as it is an example of Century Tel's effective management, which shows that Century Tel will eventually be an even stronger player in its unique role as a telecom presence operating in the shadow of telecom giants. (For more, check out The Industry Handbook: The Telecommunications Industry.)

By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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