American communications service provider CenturyTel Inc today said that its bigger peer Embarq Corp. has agreed to an all-stock merger offer that values it at $5.8 billion, a 36-per cent premium to the firm's closing price on Friday. Moreover, CenturyTel will also assume $5.8 billion of Embarq's debt, raising the deal value to $11.6 billion.

CenturyTel said it would pay 1.37 shares of stock for each share of Embarq, which translates to the equivalent of $40.42 a share. Upon closing of the transaction, Embarq shareholders are expected to own approximately 66 per cent and CenturyTel shareholders are expected to own approximately 34 per cent of the combined company.

CenturyTel operates in 25 US states, and as of last year had about 2.1 million phone lines, mainly in rural areas of regions such as Missouri, Alabama and Arkansas. Buying Embarq will help CenturyTel almost quadruple its phone lines from those levels. About two-thirds of Embarq's business is in Florida, North Carolina, Nevada, and Ohio. Currently, CenturyTel and Embarq are the eighth and fourth largest local exchange carriers in the US.

Local Exchange Carrier (LEC) is a regulatory term in telecommunications for the local telephone company. In the US, wireline telephone companies are divided into two large categories: long distance (interexchange carrier, or IXCs) and local (local exchange carrier, or LECs). This structure is a result of 1984 divestiture of then regulated monopoly carrier American Telephone & Telegraph. Local telephone companies at the time of the divestiture are also known as Incumbent Local Exchange Carriers (ILEC).

The divestiture created local exchange carriers for the management of local telephone lines and switches, and provisioning of local phone services within their business area, as well as the long-distance calls originating or terminating in their business area.

The combined Embarq-CenturyTel would operate in 33 states and have about 8 million telephone access lines, 2 million high-speed Internet customers and about 400,000 video subscribers. CenturyTel CEO Glen Post will lead the new entity.

The deal is expected to add to CenturyTel's free cash flow per share in 2010, the first full year following the expected closing. Free cash flow refers to earnings before depreciation and amortization, but includes capital spending.

CenturyTel temporarily suspended its current share repurchase program pending completion of the transaction, but after the deal closes it expects buy back some shares and continue its current dividend policy.

The companies expect the deal to generate cost-savings and revenue benefits of about $400 million annually within the first three years of operation. The synergies would include the reduction of corporate overhead and elimination of duplicate functions, new revenue opportunities and increased operational efficiencies.

Separately, both companies reported earnings. CenturyTel Inc. said its third-quarter earnings fell to $84.7 million, or 84 cents a share, from $113.2 million, or $1.01 a share, in the year-ago quarter. Sales slipped about 8 per cent to $650 million from $708.8 million.

Embarq Corp. said its third-quarter profit rose to $160 million, or $1.11 a share, compared with $157 million, or $1.01 a share, in the year-earlier period. The telecom technology company said revenue fell to $1.53 billion from $1.59 billion in the year-ago period.