Friday, April 23, 2010

CenturyTel Acquires Qwest: What’s In It for Qwest?

Facade of Qwest headquarters in downtown Denver, Colorado on May 3, 2005. REUTERS/Rick Wilking

The unwanted step child of the Baby Bells has finally found a suitor to help it beyond its awkward years, but is this acquisition good for Qwest?  After the previous CEO’s failed attempts to sell the lumbering giant to AT&T and Verizon, CenturyTel (CTL) finally a agrees to purchase Qwest (Q) for $22.4 billion including debt.  Although this is big news for CenturyTel and Qwest, the purchase will not have any major impact on the telecommunications industry or their customers.  The transaction is rather ho-hum after thinking about it.  CenturyTel’s growth has come through acquisitions of smaller players and purchasing access lines from Ameritech and Verizon.  The previous growth spurt came through the purchase of Embarq (history).  The Qwest purchase brings it from the fourth largest local phone company to the third largest with 17 million access lines and 5 million broadband users.

The advantages to CenturyTel are obvious.  It goes from a $2.6 billion per year revenue company pre Embarq acquisition to a $20 billion per year revenue company, and it increases its presence to 37 states.  The larger jewels are Qwest’s business and government customers which will more than offset the loss of land line customers all local providers experience.  CenturyTel’s business customers are mainly small and a few regional medium sized companies.  Larger companies purchase business services from AT&T, Verizon, and other carriers.  The addition of Qwest’s business services and government customers provides new and growing revenue sources.  Additionally, combining the business assets of Embarq and Qwest make the new CenturyLink a formidable competitor to AT&T and Verizon in their territories.  Once the mergers are complete and cost savings mostly realized, expect CenturyLink to make a significant wireless purchase.  Leap Wireless comes to mind.

For Qwest the advantages are difficult to find.  Qwest is clearly the acquired party with the name changing to CenturyLink and Glen Post remaining the CEO.  Watch for other executive retirements and departures in the next few months.  CenturyTel is known for its frugality so expect it to squeeze out every penny of the announced $625 million in cost reductions from mostly the Qwest assets.  Qwest employees should expect large staff reductions in marketing, accounting, operations, and engineering.  Denver and Minneapolis will be hit the hardest.  Local telephone operations will undergo a major restructuring with activities centered in Monroe, LA.  Although no one will call Qwest an innovator, CenturyTel’s services are definitely farther on the right side of the technology adoption curve.  Expect a simplification of residential and small business services to cut costs.  Also at stake is Qwest’s relationship with DirectTV since CenturyTel uses DISH.  Many of the long-haul assets will be written down in value and retired because least 33% of Qwest’s long-haul fiber routes cannot support 80-channel DWDM.  CenturyTel will leave business and government operations will remain mostly intact because those are not duplicated by the current operations and they do not want to tamper with the revenue flow.  For shareholders, the result will be a much leaner, efficient organization with a solid cash-flow.

Consumers will be impacted by the name change and a potential switch of video providers when the DirectTV contract is up; otherwise, things will stay mostly the same.  There will be no net negative impact to Qwest customers.  On the other hand, no one should expect any new innovative services or major investments in network upgrades like fiber-to-the-home or faster Internet services until the debt load is dramatically reduced.  The combined companies are firmly entrenched in DSL and will continue delivering industry average speeds at competitive prices.  This service strategy allows them to continue to milk the profits out of the old copper in the ground to pay down on the debt.  If communities are looking for faster Internet or video competition, they need to look elsewhere.

All in all, Qwest shareholders and CenturyTel benefit the most from this acquisition.  Qwest employees not in government or business services will be impacted the most and consumers are no better or worse off. 

Related Article:  Qwest Deal Is Risky Bet for CenturyTel's Chief -

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  1. Overall, a good analysis based on my opinion as a former insider. However, your comments on writing off DWDM assets because they do not support 80 channels is off target. The older network assets (the original DWDM SONET system) and some other older DWDM assets were completely impaired around eight years ago. Technically, approximately 90% of the network is Truewave Classic or better, and with the current two Ultra-Long-Haul DWDM equipment vendors, each will support 60-80 channels of 100Gbps waves based on technology available today. I know this for a fact, as I led an effort several years ago to install and test a network in Qwest infrastructure of 1500 Kms of 97 x 10G channels and 3 x 40G channels.

    On the production networks, there are currently several cross sections that have nearly 80 x 10G channels today. Both of the installed DWDM networks are relatively new, with the oldest being approximately three years old and one that is essentially new. In addition, the cost of lighting a new single-rail DWDM overlay on Qwest's nationwide fiber network with 150 Points-of-Presence is around $200M, so a write-off is pretty much immaterial. This stuff just does not cost as much as it used to cost.

    The fiber on the QC (was US West) is in general equivalent to SMF-28, and also has no significant competitive disadvantage for DWDM systems.

    Please feel free to contact me if you would like to discuss.

    Dr. Wesley Kaplow
    CTO, Network Solutions & CTO
    Polar Star Consulting, LLC

  2. Thanks Wes for your insight. I didn't realize that those assets were already written off. I seem to recall the discussion arising a couple of years ago when Qwest was trying to sell the long-haul network. The cost savings will come from CenturyLink utilizing the long-haul network instead of purchasing transport from other carriers as they currently do.