CENTURYTEL SALE PORTENDS RURAL SHAKEUP

Small market ILECs have been a bastion of stability in a beleaguered telecom market, and CenturyTel improved its already healthy balance sheet by selling its wireless unit to Alltel. Now both carriers are positioned to cut deals with Bell companies--and each other.

THE STRANGE PATH TO THE SALE

JULY 10, 2001 After being invited to bid on CenturyTel''s wireless arm, Alltel privately proposes a complete merger, but the offer is subsequently rejected

AUGUST 14, 2001 Alltel makes public its rejected offer to acquire CenturyTel and reveals the plans to separate its wireless and wireline business

AUGUST 17, 2001 CenturyTel sues Alltel for making misleading statements about the proposed merger and improperly disclosing plans to sell its wireless business

OCTOBER 31, 2001 Alltel agrees to buy 600,000 access lines from Verizon, just one week after CenturyTel agreed to acquire 675,000 lines from the Bell company

MARCH 19, 2002 Alltel agrees to buy CenturyTel''s wireless properties for $1.65 billion

Sources: Alltel, CenturyTel

But Kevin Beebe, group president of communications for Alltel, did not dismiss the possibility of Alltel pursuing CenturyTel''s wireline properties after that time limit.

“We have a strategy that still is focused on gaining telecom customers and gaining them either through wireless or local telephone lines,” Beebe said.

The deal is good for both parties. By liquidating its declining wireless business (see figure), CenturyTel can use the $1.6 billion to pay for most of the 675,000 Missouri and Alabama access lines it agreed to buy from Verizon Communications and maintain its healthy balance sheet. It also positions CenturyTel to buy other rural wireline assets from Bell companies to augment its 1.8 million incumbent access lines.

CENTURYTEL''S WIRELESS REVENUE DECLINE
Over the last three quarters, the revenue from CenturyTel''s wireless business has declined year over year, a fact that could help explain its low valuation compared with previous deals (in millions)
	2001	2000	Percent change
Q2	$109.7	$111.1	-1.3%
Q3	$115.4	$120.2	-4%
Q4	$108.5	$111.8	-3%
Source: CenturyTel

“The Bell operating companies will be selling more of their rural properties in the months ahead, and we want to be poised to be a major player in that process,” said Glen Post, president and CEO of CenturyTel.

Like CenturyTel, Alltel also has a pending wireline deal with Verizon — 600,000 lines in Kentucky — that will be funded through debt and equity sales to pay for the CenturyTel deal.

Alltel also needs to maintain its strong credit rating, said Alltel President and Chief Operating Officer Scott Ford during a conference call.

“That''s key right now. High debt levels are very out of favor on the street,” said Tom Morabito, analyst for McDonald Investments. “You don''t want to rock the boat.”

With this in mind, both companies might limit themselves to smaller deals to preserve the strengths of their balance sheets, at least until their other deals have closed. Neither CenturyTel nor Alltel would divulge which additional assets they are looking to acquire, but potential assets include access lines from Qwest Communications, Verizon or Sprint.

Few companies have successfully competed in the wireline and wireless markets, and many industry observers question this type of market play. But Alltel clearly is committed to a strategy that allows it to bundle services.

“The wireless guys for years have said bundling wasn''t going to work, but they''re struggling now,” said Craig Mallitz, vice president and wireless services analyst for Legg Mason. “Maybe the importance of bundling will come back. Operators need as many pieces of the pie as possible, [so] maybe Alltel is doing the right thing.”

Declining roaming revenues have hampered CenturyTel''s wireless division, but its purchase expands Alltel''s footprint with properties contiguous to its existing infrastructure while adding 700,000 customers at an attractive price for a wireless deal.

“Consolidation in the [wireless] industry is something that needs to take place. It will be interesting to see which big players start that process,” Beebe said. “We are doing all we can to be a part of that, and we are doing the best we can to grow.”

But there are cost measures that need to be considered, even if Alltel is in a better position to make CenturyTel''s wireless assets profitable. Alltel pays 5¢ per minute to roam in Verizon territory, which is low enough for Alltel to make money, said Charles Pluckhahn, telecom analyst for Stephens, Inc.

Alltel also plans to install CDMA technology into its wireless network and will upgrade the CenturyTel wireless properties.

“It''s not cheap. You''re probably talking $20 to $25 dollars per pop when you have 8 million pops,” said Eddie Hold, vice president of telecom services for Current Analysis. “At the same time, you have to maintain the TDMA network and persuade customers to switch. They''ll end up managing two networks for several years.”

Neither company is looking to be acquired, and in fact CenturyTel has strong anti-takeover measures in place.

A more reasonable play would be for companies to merge with or acquire a player similar in size, such as ITC DeltaCom, said Tim McElgunn, senior research analyst of competitive operator strategies for Stratecast Partners.

And there''s always the possibility of Alltel making another run at CenturyTel''s wireline side in a year. But Alltel must be an invited partner to be successful, said Chris King, associate analyst for Legg Mason. “CenturyTel will not get bought out in a hostile manner,” King said. “If, a year from now, Alltel is interested in entering a friendly negotiation with CenturyTel, that would not surprise me.”

It is possible that Alltel could be acquired, but it''s difficult to identify suitors for its wireline assets, much of which serve rural markets that do not interest Bell companies. But if the company chooses to divest its wireless business like CenturyTel has done, there will be significant interest.

“If Alltel continues to do wireless acquisitions, it can certainly turn itself into a nationwide provider, but it''s also an acquisition target that would be appealing to Verizon Wireless if you can split the wireless from the wireline,” Hold said.

---

With additional reporting by Kelly Carroll and Toby Weber in Chicago.