Sprint’s breakaway company will join with CenturyTel in a merger. The combined company will have about 8 million lines spanning 33 states, mainly in rural areas.

Even though CenturyTel is the acquirer and its management will dominate the combined company, Embarq shareholders will be owning two-thirds of it.

Embarq shareholders will get 1.37 shares of CenturyTel for each share of Embarq. Based on CenturyTels Friday close of $29.50, thats equivalent to $40.42 worth of CenturyTel stock for each Embarq share owned.

CenturyTel shares fell $3.88, or 13 percent, to close Monday at $25.62, making the value of the offered shares $5.05 billion. The days low of $24.66 was the lowest level for the shares since 2002.

Acquire

Embarq shares rose 64 cents, or 2.2 percent, to $30.38. Earlier in the day, though, the stock fell to $28.28, the lowest level since the company was spun off from Sprint Nextel Corp. in 2006.

“We believe CenturyTel is choosing an opportune time to make an acquisition,” said analyst Christopher King at Stifel Nicolaus.

At of Mondays close, there was a substantial spread between the value of the offered CenturyTel shares, at $35.10 per Embarq share, and Embarqs share price of $30.38. That indicates that investors believe theres a substantial chance the deal will be scuttled or renegotiated, probably because of the unsettled conditions in the credit markets and the economy.

CenturyTel would also assume $5.8 billion of Embarqs debt in the deal, the companies said.

The headquarters for the combined company will be in Monroe, La., where CenturyTel is based, but there will be a “significant presence” at Embarqs current headquarters in Overland Park, Kan., the companies said.

CenturyTel Chief Executive Glen Post will hold the same position in the new company, with Tom Gerke, Embarqs CEO, as executive vice chairman. Eight of the 15 board members will come from CenturyTel.

The name of the new company has not been determined.

The companies expect “synergies” of $400 million a year through the deal, in part by cutting corporate overhead costs and eliminating duplicate functions. The acquisition should also make it more attractive to upgrade the companies phone networks for broadband, video service and wireless data, they said. CenturyTel has its own network of optical fiber in the Midwest and South, which could be used to carry long-distance traffic from current Embarq customers. Sprint kept its long-distance network when it spun off Embarq.

The deal is expected to close in the second quarter next year, pending regulatory approvals.

Embarq is the largest of the so-called “independent” phone companies that werent part of AT&T back in its Ma Bell days. Other large independents are Fairpoint Communications Inc., Frontier Communications Co. and Windstream Corp.

“We believe that this is just the first transaction in a wave of consolidation in the rural wireline sector,” SurTerre Research analyst Todd Retheimer wrote in a Monday research note.

Separately, Embarq and CenturyTel reported third-quarter earnings on Monday.

Source: cavic