Analysis: Qwest acquisition will boost CenturyLink’s enterprise business

Qwest’s enterprise business is the big attraction for CenturyLink, which announced this morning that it would acquire the former Bell in a stock-for-stock transaction. The agreement is essentially a merger, with CenturyLink emerging as the dominant partner, owning 50.5% of the merged company.

The deal, expected to close in the first half of 2011, “adds important new enterprise capabilities to CenturyLink,” said CenturyLink CEO Glen Post in a conference call this morning. After the merger, a quarter of CenturyLink’s revenues will come from enterprise services, up from 11% today, the company said. In addition, the company will serve 95% of Fortune 500 companies.

In a market in which traditional residential-focused companies are losing landlines, this is a logical move. But what the combined company does not have is a nationwide wireless business — a growth engine that has helped minimize the impact of landline loss on other former Bells. Post hinted that could change moving forward, however.

As a company with larger scale, CenturyLink will have new opportunities in wireless, he said. Post also gave mixed messages about Qwest’s current deal to resell Verizon Wireless services. At one point, he said the company would take a “hard look” at that deal. But when the Verizon Wireless deal came up later on the call he said, “We’re pleased with what Qwest has accomplished.”

A logical move might be for CenturyLink to expand the Verizion Wireless deal in the short term but to seek a higher-margin solution long term by constructing its own wireless network. To do that, though, it will need either to acquire spectrum or make additional acquisitions of companies that have spectrum. The merged company will have some 700 MHz licenses, but those only cover a small portion of the combined footprint, which will include parts of 37 states.

To some industry observers, today’s announcement was not surprising. Several financial analysts predicted months ago that Qwest could be bought by a smaller telco. And former Connected Planet editor Ed Gubbins, now an analyst for New Paradigm Resources, noted in January that 2010 could be a good time for CenturyLink to purchase Qwest.

“It makes all the sense in the world for both companies,” New Paradigm Resources founder Craig Clausen told Connected Planet this morning. For CenturyLink, he said, “this opens up the entire West, international markets, additional IP markets and MPLS and fiber long-haul markets.”

CenturyLink, which last year acquired Embarq, has taken on the roll of incumbent local carrier consolidator as a result of its strong balance sheet and ability to be “forward looking,” Clausen said. Qwest, meanwhile, has never recovered from the bad management of the original incarnation of the company as a nationwide fiber network operator, which bought the Bell company US West 10 years ago.

In apparent reference to Joe Nacchio, head of the original Qwest who went to jail for insider trading, Clausen said the original Qwest “had bad people trying to do too much” and that would have “handicapped” today’s Qwest forever.

The merger agreement calls for Post to be CEO of the new company. Ed Mueller, who has been Qwest’s chief since 2007, is slated to take a position on the board of directors of the merged company.