Centrytel Purchases Embarq, Fattens for Winter

Centrytel, a big regional telco, just swallowed up Embarq, guaranteeing its survival for at least one more winter. Silicon Alley Insider reports:

Expect to see more of this: Regional phone companies teaming up to squeeze out every possible scale advantage as they decline in relevance. This morning, CenturyTel (CTL) announced it was picking up Embarq (EQ) for $5.8 billion in stock and will assume $5.8 billion in debt. (Sprint Nextel (S) spun Embarq off 2.5 years ago to focus on its wireless business.)

The companies have two big market trends working against them:

* Americans are canceling their home phone service for either wireless-only service or Internet phone service from cable companies. CenturyTel spent $149 million in the FCC’s last wireless spectrum auction for airwaves in its service footprint that can be used to offer wireless Internet, phone, and video service as early as next year.

* Most new broadband subscribers are opting for cable modem service, which is faster than the DSL service offered by CenturyTel and Embarq.

Centrytel is trying to get on the size bandwagon, but the problem is that the bandwagon itself has changed. It’s up against this (from Bloomberg):

Verizon Communications Inc., the second-largest U.S. phone company, posted a 31 percent increase in third-quarter profit after winning more wireless subscribers and selling pricier mobile e-mail and Web services.

Also from Bloomberg:

Comcast Corp. and Time Warner Cable Inc. may rely more on Internet and phone services to sustain growth in coming quarters as viewers pressed by a slowing economy cut back on extras such as HBO.

CentryTel will have a long winter ahead if it tries to stand on its own.
The only feasible long-term outlook is to beef up, then look for a buyout offer.

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