Business Context and Reporting Period
This Form 8-K Current Report, dated January 16, 2009, is filed by CenturyTel, Inc. (noting the metadata reference to Lumen Technologies, Inc., which is the successor entity to CenturyTel). The report addresses a settlement regarding litigation challenging the proposed merger between CenturyTel and Embarq Corporation. The filing supplements disclosures made in the definitive joint proxy statement/prospectus dated December 22, 2008.
Key Financial Metrics and Transaction Terms
The filing does not contain standard financial performance metrics such as revenue, profit, cash flow, or debt levels for the reporting period. Instead, it details financial terms related to the merger negotiation and litigation settlement:
- Settlement Costs: Embarq and/or its successor agreed to pay plaintiff's counsel attorneys' fees and expenses of not more than $1 million.
- Advisor Fees (CenturyTel): CenturyTel paid aggregate fees of approximately $100,000 to Barclays Capital, $88,000 to Morgan Stanley, and $836,000 to J.P. Morgan for specific services rendered in the preceding two years.
- Merger Consideration: CenturyTel's final proposal included consideration consisting of approximately 35-40% cash and 60-65% stock.
- Termination Fees: The final agreement included mutual termination fees calculated as 3.5% of the market value of the respective party plus the percentage premium implied for Embarq.
Material Changes and Litigation Settlement
The primary material event is the entry into a memorandum of understanding on January 16, 2009, to settle the class action lawsuit Tyner v. Embarq Corp, et al. filed on December 1, 2008. The lawsuit alleged breaches of fiduciary duty by Embarq's directors and aiding and abetting by CenturyTel regarding the merger agreement. The settlement requires additional disclosures regarding the merger background, which are detailed in this filing. The settlement is subject to court approval and customary conditions.
Management Commentary, Risks, and Outlook
Merger Rationale: The Embarq Board selected CenturyTel over "Company A" based on several factors:
- Balance Sheet Strength: Only Embarq and CenturyTel were investment-grade companies, resulting in a stronger combined balance sheet.
- Regulatory Approval: A combination with CenturyTel was expected to result in a shorter approval process with less stringent conditions.
- Value Creation: Management estimated that CenturyTel's proposal offered approximately 10% greater value creation based on discounted cash flow analysis and achievable synergies compared to Company A.
Executive Compensation: An amendment to CEO Thomas A. Gerke's employment agreement was finalized, deferring his right to trigger a "good reason" termination for one year following the merger.
Risks and Contingencies:
- There is no assurance that the parties will enter into a final stipulation of settlement or that the Court will approve it.
- Regulatory approvals are still pending. Public comment on FCC applications was due January 8, 2009, with reply comments due January 23, 2009. State regulatory approvals are in various stages of procedural scheduling.
- Forward-looking statements regarding synergies, cost savings, and integration are subject to risks and uncertainties.
Investor Verification Checklist
- Verify the status of the litigation settlement and whether the Court has granted final approval.
- Confirm the progress of FCC and state regulatory approvals, specifically the outcome of the public comment period and intervenor filings.
- Review the definitive joint proxy statement/prospectus (filed December 22, 2008) for full details on the merger terms, financial interests of directors, and the J.P. Morgan financial opinion.
- Monitor for any updates regarding the employment agreement amendment for Thomas A. Gerke and its impact on post-merger leadership.
- Check for any new filings regarding the attorneys' fees award up to the $1 million cap.