CenturyLink Buy of Qwest Could Get Quick Regulatory Approval

In a surprise, CenturyLink agreed to buy Qwest in a $22.4 billion deal, including a $10.6 billion all-stock transaction and $11.8 billion debt, the companies said Thursday. The deal is expected to close in the first half of 2011. It’s likely to be approved by regulators within a year with attached conditions, such as an obligation to expand broadband access or to provide it at certain prices, analysts said.

Executives from both companies expressed confidence the deal would get quick approval by regulators. Most of the states are expected to see the deal as positive, CenturyLink CEO Glen Post said on a conference call. Asked why the deal is happening now, Qwest CEO Edward Mueller said he considered it “a really good time” because the pact offers opportunities to improve Qwest’s balance sheet and take advantage of cost reductions.

The combined company will serve 37 states with some 5 million broadband subscribers, 17 million wirelines and 850,000 wireless customers, the companies said. When complete, CenturyTel shareholders are expected to own about 50.5 percent of the combined company, while Qwest shareholders will own the rest. Some $625 million of cost savings are forecast within five years of the deal’s completion. Post will be the CEO of the new company while Mueller will become a member of the board.

CenturyLink’s acquisition of Qwest is the biggest telecom merger before the FCC since AT&T’s acquisition of BellSouth, a deal approved in December 2006 after months of protracted arguments. It’s much smaller than that $86 billion deal and is likely not to face the same level of scrutiny, FCC and industry officials said Thursday. Last year, CenturyLink, then CenturyTel, completed a similar acquisition of Embarq.

"It’s so different from the Bell-IXC mergers where you had major companies merging together,” said an industry attorney and former FCC official. “It seems like it’s pretty horizontal” and won’t raise the same competitive issues. The commission will likely look at such issues as broadband deployment, jobs and other public interest considerations, the lawyer said. “I don’t know if there’s a lot of there there, other than an opportunity to extract concessions from these companies."

"Our preliminary assessment is that the government reviews would focus on conditions related to broadband deployment and job commitments, issues related to fiber/backbone assets, wholesale performance and interconnection duties affecting rival carriers, possibly targeted special-access conditions, and maintenance of service-quality levels to end users,” Stifel Nicolaus said in a research note. “Another area we plan to monitor is whether the FCC uses this deal to promote its universal service fund and intercarrier compensation reform goals in light of the current questions over jurisdiction. This would not be the FCC’s primary vehicle for ICC-USF reform, but we note that then-Chairman Martin pushed some USF changes through conditions imposed in wireless mergers, and we would expect the Genachowski FCC to keep this option open during negotiations with CenturyLink-Qwest."

"It just continues consolidation in the telecom space,” Frost & Sullivan Program Manager Mike Jude said in an interview. “It would make for a stronger market player in terms of the new company.” If you have major players who are merging, it’s the perfect opportunity to say ‘you're going to have to give something in return.'” Regulators can ask for concessions, like committing to building out broadband in rural areas, he said.

Public Knowledge said the merger isn’t that major because of the size of the players. “Qwest was the weakest of the old Baby Bells from the start.” The question is how well CenturyLink will be able to absorb Qwest, the group said: “It’s already finishing other acquisitions and integrations of operations,” said spokesman Art Brodsky.

The deal will likely be welcomed in Quest’s service territory, said an industry source with ties to the region. “From a pure industry standpoint, this is probably a good move -- CenturyLink has shown itself to be more of an entrepreneurial company.” Embarq was a “sinking ship” when CenturyLink bought it and Qwest is also one of the weaker exchange carriers in the U.S., he said. “Given how large Verizon and AT&T are now it would be good for someone to emerge that can stand up to them."

The FCC may seek to impose net neutrality conditions as part of the deal, an FCC official predicted. “At the end of the day if they [FCC Democrats] are timid on asserting jurisdiction, they will use the pending transactions to impose their agenda.” Commissioner Mignon Clyburn said in an interview for C-SPAN’s The Communicators that she’s “wary” of consolidation in certain cases. “But I do realize that sometimes it really does make sense to consolidate,” she said.

"We expect the deal to be approved by the various regulatory bodies -- the FCC, FTC and numerous state PUCs -- because the deal does not appear to present any serious anticompetitive concerns,” said Concept Capital analyst Paul Gallant. “Nonetheless, we do expect regulators to impose conditions, including broadband buildout commitments, improved treatment of CLECs, and perhaps some types of showing that the merged company will be financially solid."

The transaction shouldn’t pose major problems for federal and state regulators, though the prospects of potential job losses could create “heartburn” for organized labor and some lawmakers for whom “stubbornly high unemployment looms large as an issue in November’s midterm elections,” Medley Global Advisors said. It’s not unrealistic to expect approval by the FCC, Department of Justice and various states in six to eight months, the firm said. The apparent cost savings appear to outweigh any integration challenges and should enable the combined entity to collectively improve its telecom and broadband positions in consumer and enterprise markets relative to AT&T, Verizon and large cable operators, MGA said. Federal regulators are anxious to promote greater competition, investment and innovation in the broadband market, it said.

Moody’s changed its credit outlook for CenturyTel to “negative” from “stable,” warning of the integration risks of the deal and the prospect the companies won’t achieve the stated “synergies” in expenses and capital investment as the wireline phone business continues its long-term decline. The company will maintain CenturyTel’s headquarters in Monroe, La., but said it will have a “key operational presence” in Denver, where Qwest is now.