CenturyTel: Analyst Sees Risks In Embarq Deal

Every day, the market for wired telephone lines shrinks; that’s the obvious problem with investing in telephone companies that lack a significant wireless business. And it’s one of the reasons why D.A. Davidson analyst Donna Jaegers advises you to stay away from shares of CenturyTel (CTL) and its merger partner Embarq (EQ).

Jaegers picked up coverage of the two stocks today with Underperform ratings. Note that back in October, CTL reached a deal to acquire EQ in a stock deal in which CTL will issue 1.37 of its shares for every shares of EQ. It’s a minnow-swallowing-whale deal; Embarq’s annual sales are more than twice the size of CenturyTel’s.

Jaeger sees integration risk here, noting that the deal is 8x the size of CenturyTel’s next-largest previous acquisition.  She also worries that Embarq’s $150 million to $200 million backhaul business could be lost, and that the company could lose $300 million to $500 million of intrastate access charges if the FCC proceeds with intercarrier access reform. She also thinks there is a chance CTL will reduce its fat 10% dividend this year.

Meanwhile, she also notes that Embarq, which a concentration of lines in Las Vegas and Central Florida, is exposed to the worse of the housing foreclosure crisis. She notes that line losses have accelerated from about 6% in 2007 to about 10% by the end of 2008, and with competition from both cable companies and wireless providers.

Jaegers set a price target on CTL of $20, well below yesterday’s close at $28.12; that translates to $27.50 for EQ, below its close Tuesday at $37.85.

CTL today is up 4 cents at $28.16; EQ is up 15 cents at $38.