CenturyLink seeks to keep leverage in 2-2.5x EBITDA range post-Qwest merger, stay investment grade

By Paul Deckelman

New York, Jan. 6 - CenturyLink, Inc. - which is acquiring Qwest Communications International, Inc. - aims to keep its leverage in a range of between 2 and 2.5 times EBITDA pro-forma the merger, and hopes to maintain its currently investment-grade ratings, its chief financial officer said Thursday.

"We have always operated with a fairly conservative balance sheet," declared R. Stewart Ewing Jr., who also serves as executive vice president for CenturyLink, a Monroe, La.-based telecommunications company currently serving customers in 33 states.

Appearing at Citigroup's annual Entertainment, Media and Telecommunications Conference in Scottsdale, Ariz., Ewing noted the progress that his company had made in integrating an earlier acquisition - its 2009 purchase of Embarq Corp. - and reiterated CenturyLink's expectations of generating annual operating cost synergies of about $575 million from the Qwest purchase, which are expected to be fully realized three to five years following the transaction's closing.

CenturyLink and Denver-based Qwest, which provides telecom services in 14 states, announced plans to merge April 22, 2010. Under the terms outlined, CenturyLink will give Qwest shareholders 0.1664 of a CenturyLink share for each share of Qwest common stock they own at the closing, which is expected to take place some time in this year's first half. CenturyLink shareholders will own just over 50% of the combined company.

The deal - which is subject to approval by a number of state and federal regulatory bodies - has an estimated enterprise value of $22.4 billion, including the assumption by CenturyLink of $11.8 billion of Qwest net debt outstanding as of Dec. 31, 2009.

In its most recent 10-Q quarterly filing with the Securities and Exchange Commission, in mid-November, CenturyLink's balance sheet showed $7.06 billion of long-term debt as of the end of the third quarter on Sept. 30. In summarizing the pending Qwest transaction, it estimated Qwest's outstanding long-term debt at that time at $12.98 billion.

Eye on the agencies

Ewing told conference participants that the company will be "working with the ratings agencies between now and closing to hopefully get them over the hump" and allow CenturyLink to remain investment grade even after the merger with the currently junk-rated Qwest.

He acknowledged that with Standard & Poor's, "we're not sure there - but we're hopeful to be able to maintain the rating."

After the merger announcement, S&P and Fitch Ratings, which each give the company a BBB- long-term debt rating, put CenturyLink on watch for a possible downgrade. Moody's Investors Service affirmed CenturyLink's Baa3 rating but downgraded its outlook to negative from stable previously. All three agencies also said they would put Qwest's BB-area ratings on watch for an upgrade following the merger.

Ewing, when asked what his company's priorities for use of cash after the merger would be, said that "our first emphasis would be to try to do what's right for the shareholders."

Ewing said management's preference would be to repurchase shares rather than upping the stock's dividend, currently at $2.90 per share annually, and he acknowledged that wanting to stay on the good side of the ratings agencies was a factor in such a choice, since the agencies "do recognize and view [a dividend increase] more as a permanent decision" and would likely take a dim view of such a cash commitment.

He did not further elaborate on previously outlined plans for CenturyLink to continue Qwest's strategy of refinancing regulated debt and paying off unregulated debt, other than to say that the balance sheet for the combined company would be stronger and the combined company's leverage ratio would stay in that 2-to-2.5x range.

Regulatory process continues

The CenturyLink CFO further said that the process of regulatory approvals for the deal has moved along, with only four states still needing to give it the green light - Washington, Oregon, Arizona and Minnesota.

In Washington, where both companies already have an operations footprint, he said that hearings before the state utility commission began on Wednesday and will continue this week. Settlements have already been reached with the commission staff and consumer regulators, and while some interveners in the process are still to be heard from - chiefly rival telephone service providers - "hopefully, they'll get an order out [approving the merger] within 30 to 60 days."

CenturyLink and Qwest are awaiting the issuance of such approvals from the regulators in Oregon and Arizona and hope to make their pitch for approval at the Minnesota utility commission's February or March meeting. Both companies already operate in Oregon and Minnesota, while Qwest operates in Arizona but CenturyLink does not.

Ewing said that the companies were meantime continuing their discussions with the Federal Communications Commission on the commitments necessary to obtain FCC approval as well.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.