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CenturyTel-Qwest Impact on Channel Too Early to Tell

On April 22, CenturyTel (CTL) – which operates as CenturyLink thanks to the buyout of Embarq that closed last year – said it will buy Qwest Communications International Inc. (Q) in an all-stock, tax-free transaction. The news shocked many industry observers, not the least of whom are the companies’ respective channel partners.

Together CenturyTel and Qwest will reach 37 states with in-house broadband and wireline services, and outsourced video and wireless products. And once the $22.4 billion deal ($10.6 billion before CenturyTel assumes Qwest’s debt) closes, CenturyTel also predicts it will run a lean operation; it plans to save $575 million in three to five years by cutting overhead costs, and duplicate jobs and systems, and another $50 million by chopping capital expenditures. Most of all, CenturyTel will become the third-largest carrier serving business markets, according to research firm ATLANTIC-ACM, holding a 7.6-percent share in the United States, behind AT&T Inc. (T) and Verizon Communications Inc. (VZ) That could have a major impact on the indirect sales channel; the Qwest Business Partner Program (QBPP) arguably is the largest in the country, so agents want to know what’s in store for the channel once CenturyLink is in charge.

There’s no clear answer.

CenturyLink runs an indirect sales channel that combined Embarq’s partner presence in the SMB and enterprise space with CenturyTel’s focus down-market. But the company has been very quiet about its channel strategy – at least to the media, deferring requests for interviews with leadership about its channel plans.

A spokesperson for CenturyLink did not respond to requests for comment on the ILEC’s plans for the channel once the Qwest acquisition is finalized. However, Ted Wietecha, Qwest’s corporate communications manager, said, “It’s too early to tell.”

“For now it’s business as usual and we will continue to work with Qwest Business Partners to provide customers with exceptional products and services,” he said.

Ken Mercer, senior vice president for Telecom Brokerage Inc., a large master agency based in Chicago that works with both telcos, on April 22 sent a memo to TBI subagents that puts a positive spin on the pairing.

“We here want all of our agents to know that this possible merger with Qwest could be a very good thing with more footprint, more products and more opportunity,” Mercer wrote. He added that he did not expect to see “changes in operation, product or commissions happening in the next 18 months.”

The truth is, said Jay Bradley, president of master agency Intelisys, “none of us knows how it will pan out.” Intelisys remains “generally positive” on the news, he said, especially since functions at Embarq, for which Intelisys is an agent, have improved in recent months. One of the biggest reasons why Intelisys isn’t worried about a CenturyTel-Qwest deal is that Christopher Ancell will stay in charge of the Business Markets Group of which QBPP is a part.

“That to us is a good sign that they want to tap the expertise and the know-how of the Qwest team in Denver to run the program,” Bradley said. The CenturyLink and Qwest programs are different, he explained, and CenturyTel “is tapping into that to figure out how to make their program better and how to make Qwest’s program better.”

While CenturyLink’s channel has been dealing with the Embarq-CenturyTel integration, QBPP is not without its challenges. The program has come under fire in recent years for changes to compensation and rules of engagement that many agents have claimed put them at a disadvantage. In particular, the 2009 contract was widely criticized by the channel. The program, however, has taken on a new leader in Blake Wetzel, QBPP’s vice president of sales, who has received positive reviews from agents for his performance so far.

This morning, Wetzel met with the QBPP advisory board members to discuss the pending acquisition.

“If you put together a list of potential suitors for Qwest, this is a good suitor,” added Bradley. “This one seems to make a lot of sense. And, we think this one will have a smaller impact on [QBPP] than some others might.”

But some QBPP agents, like San Antonio-based Liquid Networx, are unfamiliar with CenturyLink and, therefore, less certain that it’s a good match. Liquid Networx CEO Don Douglas told PHONE+ his company has dealt with CenturyLink just a few times in the past several years, so he is unsure what impact the acquisition will have on Qwest’s channel program.

“On paper it appears the merged company could certainly become a much more formidable competitor,” Douglas said. “Beyond the operational efficiencies and cost savings measures are potential benefits such as more PoPs for the Qwest MPLS Network, expanded service offerings for business customers in current CenturyLink territories, a larger R&D budget to invest in product, a deleveraged balance sheet and better access to capital.”

CenturyTel’s Challenge: Business Customers

To be sure, once the takeover closes, CenturyTel will gain, among other assets, a strong standing in the enterprise market. In fact, CenturyTel expects to see 25 percent, instead of the current 11 percent, of its revenue come from large businesses. With any luck, the channel will pitch in much of that growth. Still, some observers question whether CenturyTel, the smaller of the two providers, can handle such a jump in a sector where it holds little expertise.

“It’s going to be a challenge for them because CenturyTel has not been focused that intently on the business customer,” said Donna Jaegers, a senior analyst at brokerage D.A. Davidson & Co. “Qwest brags about their growth in that area being flat in a recession…but they should have been showing growth like the CLECs.” CenturyTel, Jaegers added, “needs to up Qwest’s game.”

ATLANTIC-ACM analyst Aaron Blazar, on the other hand, said Qwest has done well with enterprise growth in the past three years. Because of that, expect the combined CenturyTel-Qwest to expand its footprint and products “to attract new customers within its last-mile footprint,” he said.

And even though CenturyTel’s strength does not lie in the business market, the company brings something important to Qwest.

“CenturyTel does have Las Vegas, so that will be very nice for Qwest to add, but I think it’s mostly about getting Qwest business services into CenturyTel territories,” said Brian Washburn, research director of network services at Current Analysis.

Mike Jude, program manager at research consultancy Stratecast, agreed, calling Qwest’s ability to carry long-haul traffic a “compelling prospect” for CenturyTel.

The looming merger also looks good for the CLECs that compete against Qwest, Jaegers said. “There’s going to be a lot of chaos in the marketplace,” she said. So now is the time for tw telecom (TWTC), PAETEC (PAET), Cbeyond (CBEY), Comcast (CMCSA) and privately held Integra Telecom to make sure they’re the “beneficiaries in the near-term.”

Washburn wasn’t convinced. “I don’t think this is the sort of thing that will drive enterprises away from Qwest,” he said. “Qwest is still committed to the optical network upgrade and doing business as usual so the merger is unlikely to affect enterprise services.”

Besides, Jude said, business customers know and expect that corporate unions such as this create some level of turmoil. “I’m sure the smaller players will be using every opportunity to market from the standpoint of service differentiators…but I think the combined CenturyTel-Qwest will maintain the share they have on the business side.”

tw telecom, Integra and Comcast all declined to comment on opportunities their companies may reap from a CenturyTel-Qwest tie-up; Cbeyond was working on a statement; and Mary O’Connell, PAETEC’s general counsel, would only say the CLEC will continue to push for “a regulatory framework that encourages competition, including the provision of reasonably priced last-mile access to end users.”

‘All CenturyTel Has to Do Is Not Screw It Up’

The marriage of CenturyTel and Qwest has its strengths. They’ll shore up one another’s standing among consumers and businesses, and may even kick off their own television service – CenturyTel is running trials of its IPTV product in certain parts of the country. Right now, CenturyTel resells DISH Network packages and Qwest is a DirecTV partner. That could change if the IPTV tests pan out.

The problem is, neither carrier has a wireless network to balance out ongoing landline losses. Both CenturyTel and Qwest resell other providers’ mobile access and a number of industry experts say that’s a weakness. Yet for some agents, that hole could mean opportunity. “Given that CenturyLink has successfully done a number of acquisitions, it will be interesting to see if they are done or would continue to round out their portfolio after digesting Qwest by adding a nationwide CLEC or an orphaned wireless player such as Sprint or T-Mobile,” Douglas said.

All the same, none of Wall Street’s major ratings firms liked the CenturyTel takeover of Qwest. In fact, each switched its view of CenturyTel to negative. Moody’s Investor Services, for example, warned of the deal’s integration risk and cited concerns over the companies’ expected cost savings. However, Moody’s did agree with CenturyTel that the transaction stands to produce significant free cash flow after all the slashing and burning is done. Standard & Poor’s Ratings Services said it would improve its view if CenturyTel can detail its planned business and financial strategies. And Fitch Ratings said CenturyTel’s high debt load of $7.75 billion, and the assumption of $11.8 billion of Qwest’s net debt, could hurt performance.

Both Fitch and S&P said the deal bodes well for Qwest.

Other analysts didn’t see the situation as quite so grim for CenturyTel – or Qwest, for that matter. “I was originally thinking, ‘Does this justify a negative rating from us?’ And I really can’t justify it because all CenturyTel has to do is not screw it up,” Washburn said. He did, however, question CenturyTel’s forecast $625 million in “synergies.” “That’s a lot of stuff to cut and I would guess that reaching those numbers may mean having to cut into customer service people and running technicians on the ground.”

Jaegers and Judge agreed. “Qwest has been cutting their operations to the bone for years. It’s not like they’re sitting fat and happy,” Jaegers said.

“The primary overhead is people,” Jude said. “The people I’m talking to are in IT and public policy and they’re looking at this going, ‘Damn, this is not going to be pretty.’ And I agree with them – I don’t think it will be.”

Still, CenturyTel itself will see one big perk: better free cash flow. That’s because CenturyTel will carry forward Qwest’s net operating losses, which means earnings will be taxed at a lower rate. CenturyTel could then use the leftover money to pay down debt, buy back stock or invest in operations. Shareholders, too, will derive some benefits. First, CenturyTel is awarding Qwest shareholders a 15 percent premium over Qwest’s closing stock price on April 21. Plus, those investors should get about 50 percent more out of their annual dividends, Qwest CEO Ed Mueller said in a press release. CenturyLink’s annual dividend amounts to $2.90 per share.

Meanwhile, if all goes as intended, CenturyTel executives will run most of the new combined company. William Owens, a CenturyTel director, will serve as chairman of the board; CenturyTel CEO Glen Post will take over as CEO and president; CenturyTel CFO R. Stewart Ewing will keep that role; and CenturyTel COO Karen Puckett will remain in that position. Ancell will keep his job as head of Qwest’s business markets group. Mueller, meanwhile, will become a board member.

The combined company will operate out of CenturyTel’s Louisiana headquarters but will keep a regional headquarters, the Qwest Business Markets Group and other, unidentified, functions in Qwest’s home base of Denver. Still, if one party balks at the merger, the companies have agreed that Qwest will pay CenturyTel a $350 million termination fee if it scraps the deal, and for CenturyTel to fork over the same amount if it ends to the transaction.

Will the FCC Delay the Merger?

CenturyTel hopes to wrap its purchase of Qwest by the first half of 2011. That could be an ambitious timeline. For one thing, CenturyTel has not finished working Embarq into its operations. For another, the FCC, one of the key agencies that must approve the CenturyTel-Qwest pairing, may impose some conditions that could delay integration.

“This is a rather bad time to be pursuing this kind of merger,” said Jude. With the formation of the national broadband plan, and its intent to govern net neutrality, the FCC could “go for its pound of flesh,” Jude said. In other words, commissioners could require certain concessions or commitments with respect to broadband, and those demands would add up both in terms of cost and time.

But Rebecca Arbogast and David Kaut, telecom analysts for investment bank Stifel Nicolaus, don’t expect a holdup. Reviews on the part of the Justice Department, FCC and numerous state public utilities commissions probably will focus on conditions related to broadband deployment and jobs; issues of fiber and backbone assets; wholesale performance; interconnection duties affecting rival carriers; special access; and maintenance of service-quality levels, they wrote in an April 22 client memo. On the whole, though, “we don’t expect any antitrust or regulatory hurdles high enough to block the deal.”

Jeffrey Silva, senior policy director of telecom, media and technology at Medley Global Advisors, another investment bank, also forecast little government interference. “Federal regulators are anxious to promote greater competition, investment and innovation in the broadband space,” he said.

One issue that remains unclear is how the CenturyTel-Qwest merger will impact Qwest’s pending forbearance petition for the Phoenix area. The proceeding is about two years old; Qwest wants relief from certain network-sharing rules and the merger could mean less support for easing Qwest’s obligations. The FCC has asked for more public input on that request – comments are due April 29 – and did so before CenturyTel and Qwest announced their plans.

—With reporting by Khali Henderson

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