CenturyTel Inc., the country's fifth-largest local-phone company, said Thursday that it will buy Qwest Communications International Inc., the third-largest, in a stock swap worth $10.6 billion to gain the benefits of scale in a shrinking business.
The combination would have about 18 million phone lines serving customers in 37 states, but would still be dwarfed by AT&T Inc. and Verizon Communications Inc. It would be based at CenturyTel's headquarters in Monroe, La., rather than in Denver, where Qwest is based.
The number of landlines in the U.S. shrinks by about 10 percent per year as consumers chose to rely on their wireless phones or service from cable companies. The fourth-largest provider of landline phone service in the country, by number of subscribers, is now cable company Comcast Corp.
The acquisition continues a trend of consolidation in the landline business. But neither Qwest nor CenturyTel own wireless networks that can compensate for the loss of landlines, as AT&T and Verizon do.
But they hope the acquisition can make their combined company more competitive as a provider of telecommunications services to businesses and expand the reach of their broadband Internet service for consumers.
Analyst David Dixon at FBR Capital Markets noted that the federal government is moving to shift subsidies away from rural phone service and toward broadband lines. Rural phone subsidies are a large source of revenue for CenturyTel, and the shift could be a challenge.
The deal would likely to lead to job cuts at the companies, which are already shedding positions. The Communications Workers of America, the largest union in the telecommunications industry, said it "looks forward to serious discussions" with both companies.
CenturyTel, which does business as CenturyLink, acquired Embarq Inc., the landline service company once part of Sprint Inc., last year.
Qwest provides traditional phone service in 14 mostly Western states and is a successor to one of the regional Baby Bell companies spawned by the breakup of AT&T in the 1980s. Financial maneuvers during the Internet boom left it saddled with a heavy debt load, making it an unlikely acquirer, even though it is larger than CenturyTel.
CenturyTel is offering stock worth about $6.02 per share for each Qwest share, a premium of about 15 percent to Qwest's Wednesday closing price of $5.24.
Qwest stockholders would receive 0.1664 CenturyTel shares for each share they own and hold 49.5 percent of the new company, while CenturyTel stockholders would own 50.5 percent of the business.
CenturyTel would also assume $11.8 billion in Qwest's debt.
Both companies' boards have approved the tax-free acquisition, which is expected to close in the first half of 2011. They expect the acquisition to save the combined company $625 million over three to five years following the close of the deal.