Kansas City Business Journal

Embarq Sale Sets New Tone

By Suzanna Stagemeyer

October 31, 2008

Embarq Corp. surprised many with its Oct. 27 announcement of plans to sell itself to a peer half its size.

Buyer CenturyTel Inc., based in Monroe, La., agreed to buy the Overland Park-based company in a deal valued at $11.6 billion. The companies expect the transaction to close in the second quarter with shareholder and regulatory approval.

Until recently, many had expected Embarq, the largest among rural phone companies, to be a buyer instead. The deal leaves Kansas Citians wondering about the ripple effects of losing a Fortune 500 company headquarters and the additional local job cuts that most likely will bring.

Embarq CEO Tom Gerke, who has been at the helm since early this year, said that the companies looked at several different structures but that this deal offered the best opportunity for shareholders.

“I still think of it as just the two companies coming together to form a stronger company,” he said. “This industry has been under a high level of competitive pressures, and I think we need to take strategic steps to improve our strategic position.”

Embarq doesn’t have the luxury of a growth industry.

The wireline phone business has demanded consolidation as consumers hang up landlines in favor of mobile phones. Business combinations offer local phone companies savings opportunities as they bleed customers and try to pump up data and video sectors.

When Embarq spun off from Sprint Nextel Corp. in 2006, it had about 4,500 local employees. That number has been whittled to about 3,450 people. With the headquarters move to Louisiana and plans to reach savings of about $400 million a year in the first three years of operating together, that number probably will drop further, though Gerke said the combined company will maintain a “substantial presence” locally. About $300 million will come from operational savings.

Analysts said that historically when phone companies merge, the actual savings are greater than estimated.

“It’s cold, hard calculus here,” said Rich Nespola, CEO of TMNG Global Inc. “Yes, there will be fewer employees in the combined entity. From where they’re going to be reduced, who knows, but in the areas that are staff functions ... most likely the acquirer would keep their staff in place.”

But Gerke said CenturyTel has maintained operations in areas where it has acquired companies.

“They have a history of not paying lots of relocation expenses,” Gerke said. “Rather, they’ll be utilizing resources and talent throughout the current footprint and what will be a 33-state footprint when the deal is consummated.”

Embarq’s effect on Johnson County is significant and has been for some time, said Doug Davidson, president of County Economic Research Institute Inc.

He didn’t have numbers to demonstrate but described it as a ripple effect in which Embarq brings revenue from throughout 18 states locally, paying employees who spend money in the area and paying local vendors that do the same.

“Virtually every industry benefits,” Davidson said. “If they reduce spending here, it will have a negative economic impact.”

But that possibility, along with many other pieces of the deal, remains unclear. When Sprint’s headquarters moved to Virginia upon its 2005 merger with Nextel, the company kept an operational base in Overland Park, so relatively few jobs were cut, Davidson said.

Some of Embarq’s local vendors also do business with CenturyTel and so hope to continue that relationship after the companies combine.

Kansas City-based Winntech Inc. has designed retail stores for both companies, CEO Barrett Prelogar said. The two have similar business approaches, making them a good combination, he said.

“I have to imagine that we’ll probably be able to do work for both ends of the company,” he said.

And layoffs can push potential entrepreneurs to start businesses, said Joe Mullins, president of the Avvio Center, a business incubator.

“We will see, I think, increased entrepreneurial activity,” he said.

A deal was inevitable, Nespola said.

“If it wasn’t Embarq and CenturyTel, it would be Embarq and somebody else or somebody else and Embarq,” said Nespola, whose communications consulting firm works with both companies.

CenturyTel has made many acquisitions in the past to build the business, said Todd Rethemeier, a Soleil Securities Group Inc. analyst who doesn’t own stock in the companies.

“CenturyTel wanted to be a survivor in this industry,” he said. “I think they realized that if they didn’t do something this year, somebody might come along and buy them. It was partly a defensive move.”