A Small Town vs. a Very Big Deal


Clarke Williams and Monroe (La.)-based CenturyTel go back a long way together. The little rural phone carrier Williams took over in 1946 -- the precursor to CenturyTel -- was a gift from his parents. Even as Williams built CenturyTel into a telecom giant, he remained true to his small-town roots. Through the years, he served as the mayor of nearby Oak Ridge, La., and sat on the boards of a local hospital and a college.

So, it came as no surprise to people around Monroe when Chairman Williams and his board on Aug. 14 rejected an unsolicited $9 billion bid from rival ALLTEL (AT) involving cash, stock, and assumption of debt. This hostile bid threatens to shake the very foundation of CenturyTel (CTL) and tear apart the close-knit community so dear to Williams.

The merger could lead to massive layoffs in Monroe, population 52,114, and the surrounding area, says Andrew Hamerling, analyst at Banc of America Securities. Many area residents -- several generations' worth, in fact -- have enjoyed lifelong employment at CenturyTel. The U.S.'s eighth-largest local-exchange carrier, which is also the eighth-largest wireless operator, employs about 7,000 people and is "a real fixture in Monroe," says Peter Friedland, analyst with investment bank WR Hambrecht.

"NOT FOR SALE." To be sure, ALLTEL is offering an impressive price -- more than a 40% premium on the pre-bid share price of around $30. But the company's execs and employees own 30% of CenturyTel's voting stock and 5 of the 14 board members are former or current employees, explains Hamerling. Thus, there's a lot of resonance when management says, "This company is not for sale."

Nonemployee shareholders dispute the wisdom of rejecting the offer. "ALLTEL has made a competitive bid, and CenturyTel should sit down to discuss a deal with them," says David Katz of Matrix Asset Advisors, who manages $750 million in investments. Less than a year ago, he poured more than $1 million into CenturyTel's stock. Katz says the board "should reconsider," adding that he called CenturyTel officials on the morning of Aug. 16 and told them exactly that in no uncertain terms.

CenturyTel's stock peaked at more than $48 at the end of 1999. With management rejecting ALLTEL's $43-a-share bid, it is now trading at only around $35. Also, CenturyTel's plans to increase shareholder value by splitting its wireless and local-phone businesses might create less shareholder value than the ALLTEL offer, say some analysts.

RICHER BID? CenturyTel's financial and legal advisors, J.P. Morgan and Wachtell, Lipton, Rosen & Katz, apparently think otherwise. And without the board's cooperation, ALLTEL likely won't get far. While the company could mount a hostile takeover, it would have a tough time breaking down CenturyTel's defenses. Among other features, company rules prevent the entire board from being ousted in a single proxy contest.

More money could change that. If ALLTEL raises its bid, the deal might yet go through, suggests Friedland. On the expectations of such good news, four analysts upgraded the ALLTEL stock in the wake of the bid (two issued downgrades). "If a couple of things happen, you can make some money here," says Anthony Ferrugia, analyst with A.G. Edwards & Sons. Meanwhile, two analysts upgraded CenturyTel's stock and one downgraded it.

MERGER PROS. What's the case for a merger? If the deal goes through, "this could be sufficient scale to be a major telecommunications player," according to an Aug. 15 Banc of America Securities report. The combined company would service 7.2 million wireless customers and 4.4 million local-phone customers. Today, the companies are the most profitable regional providers in the country.

ALLTEL, whose business is concentrated in the Southeast, would increase its footprint in CenturyTel territories: Mississippi, Louisiana, and Arkansas. Economies of scale would result in $100 million in savings on combined revenues of $10 billion, according to ALLTEL's calculations.

In addition, ALLTEL, which boasts higher margins and penetration, could improve CenturyTel's performance in the wireless business, says Bo Fifer, analyst with Deutsche Banc Alex. Brown. CenturyTel's margins on its phone business stand at 54%, while ALLTEL's reach nearly 61%, estimates one analyst. And while ALLTEL enjoys wireless penetration of 13%, CenturyTel offers its cellular services to 9.5% of its area's population, he reports.

MERGER CON. Not surprisingly, CenturyTel has a different view of the matter. In his Aug. 16 e-mail to analysts, the company's vice-president of investor relations, Jeff Glover, wrote: "This upside we can pursue without ALLTEL. We believe the topline growth in our wireline business is going to exceed that of ALLTEL's."

However, competition in the wireless services sector is intensifying and customers increasingly demand national roaming plans. CenturyTel lacks roaming agreements with national carriers and can't offer a competitive nationwide plan, says Fifer. Through a merger with ALLTEL, the company could take advantage of ALLTEL's roaming agreement with Verizon, which allows ALLTEL to provide flat-rate national calling plans at cost, he says.

Most important, keeping regular phone and wireless services together makes sense. Customers like to buy their wireless minutes, local-phone minutes, and Internet access from one vendor. That's why ALLTEL doesn't want just part of CenturyTel's business: Company execs months ago decided against buying CenturyTel's wireless business as a stand-alone when CenturyTel broached the idea.

BACK-UP PLAN? Some analysts believe CenturyTel's strategy of splitting up the business would bring the company's shareholders more value. After all, CenturyTel's wireline business might grow through acquisitions, and its wireless unit could gain access to more capital, says John Bauer II, analyst at investment bank Gerard Klauer Mattison & Co. On Aug. 17, CenturyTel's President and CEO Glen Post reiterated the board's decision and noted that his company would be happy to talk to ALLTEL about selling CenturyTel's wireless business -- but only that.

However, ALLTEL doesn't seem likely to give up its bid easily. "When they made the offer, they knew CenturyTel wasn't interested," says Nancy Kaplan, vice-president at technology consultancy Adventis. "They must have had a back-up plan."

The bottom line: "The status quo can't continue," says one analyst. "I think [CenturyTel's management] will come to see the logic of it." Maybe so. But the traditions and family ties that bind the company and its management are also very strong. By Olga Kharif in New York


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