The Louisiana purchase: CenturyTel acquires former GTE properties

CenturyTel continued its rural expansion last week by closing two deals with Verizon for former GTE properties, which adds about 360,000 access lines and associated infrastructure to its network. The Louisiana-based communications company will spend almost $1.1 billion for properties in Missouri and Arkansas.

CenturyTel has spent about $3.9 billion in former incumbent carrier land-based facilities during the last three years. The company has acquired almost 1.1 million access lines in nine states (see table).

"Our strategy over the years has been to develop clusters of access lines in rural and smaller urban areas of the country," said Stewart Ewing, executive vice president and chief financial officer for CenturyTel.

The cluster in Arkansas accounts for the remaining GTE properties in the state. The 231,000 lines that GTE voluntarily put up for bid sold for about $824 million in cash.

CenturyTel has since divested itself of its Alaskan properties, partly to finance the most recent acquisitions.

"We didn't see that much growth potential in the Alaskan properties. We talk about rural in the lower 48 states, but rural in Alaska has a whole different meaning," Ewing said. "We knew there would be additional properties coming on the market that would be a better deployment of our capital than the Alaskan properties."

In Missouri, CenturyTel acquired 107 telephone exchanges, an all-digital switching network and 700 route-miles of fiber.

CenturyTel's "geographic clustering" strategy provides it with economies of scale from networking and marketing standpoints, Ewing said. The Arkansas properties have three clusters adjacent to property that the company already owns, some of which also is covered by CenturyTel's wireless network. The expanding carrier will offer bundled local, long-distance, wireless and broadband service.

"Across our system, 25% of our access line [customers] utilize CenturyTel as their long-distance provider as well," Ewing said. By the end of this year, the company expects to have 40% of its lines DSL ready. It already has started to integrate the new properties with its existing back-office systems.

"The Verizon access line acquisitions will help accelerate internal growth rates over time as synergies are captured," Frank Governali, an analyst for Goldman Sachs, wrote in a report on CenturyTel's second quarter earnings.

CenturyTel expects to generate $280 million annually from the Arkansas and Missouri properties, said a company spokesman.

However, realizing that revenue could take time, Governali said. "The Verizon lines generate lower margins and lower revenue per line than [CenturyTel's] lines do on average," he said. "However, the silver lining here is that the lower margins on these lines create the opportunity for future growth."

The prospect of growth through more acquisitions also is ripe, said Ron Cowles, principal analyst for Dataquest.

"As time goes on, you will see a lot more of this," Cowles said. "I think you will see Verizon unload a lot of GTE properties that really don't make sense for the Bell Atlantic strategy."

CenturyTel will be watching.

"We will look at properties as they become available, and we will pursue an edge-out strategy that looks at markets adjacent to, or in close proximity to, our local exchange properties," Ewing said.