updated 9/18/2006 11:48:23 AM ET 2006-09-18T15:48:23

Rural telecommunications provider Citizens Communications Co. said Monday it is buying a smaller rival, Commonwealth Telephone Enterprises Inc., for $1.16 billion in cash and stock.

Stamford, Conn.-based Citizens said the acquisition will allow it to expand its reach in Pennsylvania, where Commonwealth has operated in rural markets since 1897.

With annual revenue of about $2.4 billion, the combined company would be the nation’s seventh largest local telephone company, Citizens said.

Citizens, which offers telephone, Internet and cable services under the Frontier brand name in 23 states, said it will save $30 million through operational efficiencies and the elimination of corporate overhead.

“Commonwealth has operated its Pennsylvania markets successfully for many years,” said Maggie Wilderotter, Citizens’ chairwoman and chief executive. “We will build on this momentum and overlay our full-service communications products and solutions to enhance current offerings.”

Under terms of the deal, shareholders of Dallas, Pa.-based Commonwealth will receive $31.31 in cash and 0.768 shares of Citizens’ common stock. The offer represents a 17 percent premium over Commonwealth’s closing share price of $35.60 on Sept. 8, the last business day before the company’s Sept. 11 announcement that it was exploring strategic opportunities.

Commonwealth shares shot up sharply in late morning trading on the Nasdaq. Citizens shares were down slightly on the New York Stock Exchange.

“Having reviewed a number of strategic opportunities, we concluded that this was the right transaction at the right price for our shareholders and other key constituencies,” said Mike Mahoney, president and CEO of Commonwealth.

UBS analyst John Hodulik, in a research note, said the purchase fits Citizens’ strategic criteria, given Commonwealth’s “rural footprint, relatively good regulatory relationships and ability to leverage (Citizens) investment in IT and customer care.”

He rated the company’s stock “neutral” with a target price of $14.

The deal, which is expected to close in the middle of 2007, has been approved by the boards of both companies. It is subject to regulatory and shareholder approval.

Citizens plans to finance the cash portion of the acquisition with a combination of cash and debt. The company said it will continue paying its current annual dividend of $1 per share.

Following the acquisition, Citizens will have 2.6 million access lines, 388,000 high-speed Internet subscribers and 6,600 employees.

Citizens reported net income of $202 million on sales of $2.2 billion in 2005. Commonwealth had revenues of $70 million on sales of $334 million in 2005.

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