Business Context and Reporting Period
This Form 8-K/A, dated August 1, 2002, reports on CenturyTel, Inc.'s strategic restructuring involving the divestiture of its wireless operations and the acquisition of local exchange assets from Verizon Communications, Inc. The filing details the completion of the wireless sale on August 1, 2002, and the pending acquisition of Verizon's Missouri operations, expected to close on or about August 31, 2002. The Alabama acquisition was completed on July 1, 2002.
Key Financial Metrics
Wireless Disposition
- Sale Price: Agreed at $1.65 billion; actual cash received approximately $1.58 billion due to a cross-ownership restriction on one minority-owned market.
- After-Tax Proceeds: Expected to be approximately $1.255 billion.
- Contingent Sale: Alltel agreed to purchase the remaining minority interest for approximately $68 million if the FCC waives the restriction by February 1, 2003.
- Assets Divested: Majority-owned cellular systems (783,000 customers, 7.8 million pops), minority cellular equity interests (1.8 million pops), and PCS licenses (1.3 million pops).
Verizon Acquisitions
- Alabama Operations: Acquired for approximately $1.0 billion cash (closed July 1, 2002). Serves approximately 304,000 switched access lines.
- Missouri Operations: Expected acquisition price of $1.159 billion cash (closing ~August 31, 2002). Serves approximately 371,000 switched access lines.
- Total Acquisition Cost: $2.159 billion for both states.
Pro Forma Financial Impact (Year Ended Dec 31, 2001)
- Pro Forma Net Income: $234.0 million (compared to historical CenturyTel net income of $343.0 million, which included wireless operations).
- Pro Forma Operating Income: $647.9 million.
- Pro Forma Total Assets: $7.79 billion (as of March 31, 2002).
- Pro Forma Long-Term Debt: $2.99 billion (reflecting new financing for acquisitions).
Acquired Assets Performance (Verizon Special Purpose Statements)
- Alabama (Year Ended Dec 31, 2001): Operating Revenues of $256.2 million; Net Income of $60.8 million.
- Missouri (Year Ended Dec 31, 2001): Operating Revenues of $295.9 million; Net Income of $65.6 million.
Material Changes and Strategic Shifts
The company is fundamentally altering its business mix by exiting the wireless market entirely to focus on wireline telecommunications. The $1.58 billion in cash proceeds from the wireless sale is being utilized to finance the $2.159 billion Verizon acquisitions. The pro forma financials reflect the removal of wireless operations as "discontinued operations" and the addition of Verizon's Alabama and Missouri assets. Consequently, while total revenue increases due to the acquisitions, net income decreases in the pro forma view due to the elimination of profitable wireless earnings and the addition of interest expense on new debt.
Guidance, Outlook, and Risks
Financing Strategy
CenturyTel plans to finance the Verizon acquisitions using:
- $1.255 billion in after-tax proceeds from the wireless sale.
- $483.4 million in net proceeds from the sale of equity units in May 2002.
- $420.6 million from a sale of debt securities in the second half of 2002.
The company assumes a weighted average interest rate of 7.4% on the $904 million of net new indebtedness.
Risks and Contingencies
- Regulatory Approval: The Missouri acquisition is contingent on receiving necessary governmental approvals and waivers.
- Financing Availability: The company notes that given the recent decrease in financing availability for communications companies, there is no assurance that sufficient financing will be available on attractive terms.
- Integration: Risks associated with effectively integrating new businesses and the potential for operating results to differ from historical Verizon data due to different management structures.
- Contingent Sale: The $68 million sale of the minority wireless interest is not guaranteed and depends on an FCC waiver.
Investor Verification Checklist
- Verify the closing status and regulatory approval of the Missouri Verizon acquisition.
- Confirm the final allocation of the $2.159 billion purchase price, specifically the valuation of identifiable intangible assets and goodwill.
- Monitor the actual interest rates secured for the new debt and equity unit issuances against the assumed 7.4% rate.
- Track the FCC decision regarding the cross-ownership restriction to determine if the additional $68 million wireless sale proceeds will be realized.
- Review the integration progress and cost synergies realized from combining the Verizon assets with CenturyTel's existing operations.