Reasons for the Quest Merger with CenturyTel

Reasons for the Qwest Communications International Inc.(Q) merger with CenturyTel, Inc. (CTL) aka CenturyLink, are ultimately financial. Both companies are involved with telecommunications making the merger an expansion of existing services and infrastructure. 

Qwest assets come at a used prices, and its financial statements reveal potential improvements to cash flow in addition to gaining a new revenue base. CenturyTel's merger with Qwest Communications International Limited would also better qualify the newly formed company for 'broadband stimulus subsidies' according to Karl Bode in an April 23. 2010 report at http://www.dslreports.com.
• Billions of Federal grant funds

The American Recovery and Reinvestment Act of 2009 has apportioned $7.2 Billion dollars for Broadband services across the U.S. This part of the act is contained within Title VI and called the Broadband Technology Opportunities Program.(4) For a company like CenturyLink that's already in the telecommunications business, the Federal (taxpayers) money is  a source of investment capital that apart from debt and equity has lower cost than both these other options.

• Qwest financial statements:

Another reason for the  Qwest merger with CenturyTel is that Qwest is a profitable company, or has been one since 2007. Its 2009 Net income was $662 million and Q1 2010 net income was $38 million.(5) Also, recent operating margin as of May 2010 was 16.99% indicating a lean operation, operating cash flows were high, and profit margin was 4.08% for the same. This is not to say Qwest doesn't need work, it does with negative revenue growth, and a current ratio reflective of too much company liability.

• Increased free cash flow earnings per share

Qwest communication's April 22, 2010 press release pertaining to the prospective merger states "The parties expect to be accretive to CenturyLink's free cash flow per share". (1) An increase to free cash flow per share, if realized, would essentially mean the newly merged corporation would have greater access to cash which allows more potential for the company at less cost.

• Marketing return on investment

CenturyTel's merge with Qwest would also be sweetened by Qwest's existing customer base comprised of millions of active broadband lines that would otherwise be somewhat inaccessible. This affords CenturyTel potentially greater marketing returns. In other words, an increased market share affords higher cross selling opportunities, and an occasion to improve service for existing CenturyTel clients with the financial and strategic leveraging made possible through the merger.

•  Telecommunications infrastructure

A fifth reason for CenturyLink's merger with Qwest Communications International  Inc. is the telecommunications infrastructure that the new company would have access to. After depreciation, and assuming a life after depreciated assets, this infrastructure is coming used, but more affordably for CenturyTel, a price $25 billion cheaper than original purchase price according to Karl Bode of http://www.dslreports.com. (3)

As of May 2010, the CenturyTel merger with Qwest has yet to occur. The merger agreement itself allows cancellation of the merger agreement if said agreement is not entered into by April 2011, and both Federal Communications Commission (FCC) and shareholder approval is needed for the merger according to the Qwest's April 22, 2010 press release. If the merger between CenturyTel and Qwest Communications does take place it would make CenturyTel the 3rd largest landline phone service provider in the U.S.(2)

Sources:

1. http://news.qwest.com/centurylinkqwestmerger
2. http://bit.ly/9fJe6B (MarketWatch)
3. http://bit.ly/9wxpX5 (DSLReports)
4. http://bit.ly/abFVn8 (Library of Congress)
5. http://finance.yahoo.com/q?s=Q (Yahoo Finance)