“There has been a lot of talk recently about Embarq wanting to be acquired,” Kagan told MarketWatch.com. “However, the financial crisis that is on the front page every day made finding a partner difficult. That may have lowered the price Embarq hoped to get. CenturyTel saw an opportunity and jumped in to acquire Embarq. Timing was on CenturyTel’s side in this deal.”

The all-stock deal – announced yesterday (Monday) – calls for CenturyTel to pay $5.8 billion for Embarq, and to assume $5.8 billion of that company’s debt, Network World reported.  The buyout will knit together two phone companies with a local/regional focus that cater chiefly to customers in less-populated parts of the country, MarketWatch reported. The new combined venture will have operations in 33 states and combined revenue of more than $8.8 billion.

The acquisition “makes great strategic sense,” Glen F. Post III, the chairman and chief executive officer of CenturyTel, who will assume the CEO’s mantle with the merged company, said during a conference call yesterday. “It diversifies our revenue and provides us with expanded networks, expertise and financial resources to build long-term shareholder value.”

U.S. telecom carriers have spent at least $150 billion on acquisitions during the past three years as they bulk up to slash operating expenses – and to match up better against new rivals emerging from such businesses as cable TV and wireless communications. Already this year, Verizon Communications Inc. (VZ) agreed to buy Alltel Corp. for $5.9 billion in cash and $22.2 billion in debt, a move that makes it the largest U.S. phone company, Bloomberg News said.

Verizon reported its third-quarter earnings yesterday. [For additional details, check out Money Morning’s Global Investing (News) Roundups, elsewhere in this issue.]

CenturyTel rebuffed a $9.2 billion offer from Alltel in 2001, selling the phone-service operator its wireless assets instead.

Analysts expect the deals to continue – and probably to accelerate. Indeed, Credit Suisse Group AG (ADR: CS) analyst Chris Larsen wrote in a research note that the CenturyTel/Embarq merger would likely serve as the catalyst for the long-expected wave of consolidation deals between rural telecom carriers. Those deals could well include a move by Windstream Corp. (WIN) – the second-biggest rural carrier – to buy out the much-smaller Frontier Communications Corp. (FTR).

“We think a Windstream/Frontier transaction is the next most logical [deal],” Larsen wrote.

Consolidated Communications Holdings Inc. (CNSL) is also viewed as a potential buyout target, Reuters reported.

CenturyTel may also look at doing more deals within in a year, if there are more buyout opportunities that match up well, Post, the CEO, said.

Embarq solicited offers earlier this year, but the company’s plans to auction itself off to the highest bidder were shelved by the global credit crisis, which made it tough for potential suitors to line up financing for any deal. In early October, however, news reports surfaced that Embarq had hired JPMorgan Chase & Co. (JPM) to look for buyers for the company.

The Overland Park, Kan.-based Embarq is the local phone company created by the 2006 spin-off from Sprint Nextel Corp. (S), and its service area covers 18 states. It provides local and long-distance communications services to both consumer and business customers. This includes voice, data, high-speed Internet, satellite video and wireless services, sold both on a wholesale level and through third parties.

CenturyTel also provides local and long-distance voice, Internet, broadband and television services in 25 states. As of Dec. 31, its local exchange telephone services unit operated 2.1 million telephone access lines in 24 states, of which about 70% were concentrated in Alabama, Arkansas, Missouri, Wisconsin and Washington.

The buyout price of $40.42 per share for Embarq represents a 36% premium over the company’s closing share price from Friday.  Since Embarq is twice as big as CenturyTel, Embarq shareholders will own about 66% of the combined company after the deal closes.

Although Embarq is the larger of the two companies, it faces greater competition from cable operators and other telecom-service providers because it operates in some urban and suburban markets. The Monroe, La.-based CenturyTel operates almost entirely in rural areas where competition is less intense.

But the newly merged venture should be much more competitive overall, since it could realize annual savings of about $400 million within three years, executives with both CenturyTel and Embarq said on yesterday’s conference call.

While Post remains as CEO of the merged company, Embarq CEO Thomas A. Gerke will stay on to serve as executive vice-chairman.

CenturyTel yesterday reported operating revenue of $650 million for the third quarter of 2008, down more than 8% from the same quarter in 2007. Net income was $82.8 million, down more than 23% from a year ago.

Embarq yesterday reported operating revenue of $1.5 billion for the third quarter of 2008, down about 4% from the third quarter of 2007. Net income was up nearly 2%, to $160 million. Through the first three quarters of the year, the company’s operating revenue was $4.6 billion, down from $4.8 billion for the first nine months of 2007.

Once the deal is finished, the newly combined company will have about 8 million telephone customers, 2 million broadband customers, and 400,000 video customers.

The purchase is CenturyTel’s largest since selling shares to the public in 1968, and may pose a challenge – in part because it will bolster the company’s subscriber ranks in such economically hard-hit regions as Nevada and Florida, where foreclosure rates have jumped, Bloomberg said.

“This increases CenturyTel’s exposure to some difficult economic environments like Las Vegas and Florida, markets that have been a little more hard hit than they’re used to serving,” Stifel Nicolaus & Co. Inc. (SF) analyst Chris King told Bloomberg. King rates CenturyTel shares as a “Buy.”

Before the deal can close, stockholders from both companies will have to provide their approval. The merger will also have to pass muster with state and federal regulators. The companies hope to close the deal in the second quarter.

Source: CenturyTel’s Buyout Bid for Embarq Will Likely Jump-Start a Wave of Mergers Among Rural Telecom Players

On Sept. 29, Citigroup bid $2.2 billion for Wachovia’s banking operations, but left both Wachovia’s A.G. Edwards brokerage unit and its Evergreen mutual fund family on the table. That left the door open for Wells Fargo to swoop in four days later with a $12 billion bid for all of Wachovia’s operations. That includes a $498 billion loan portfolio that carries $122 billion of option adjustable-rate mortgages (ARMs), of which Citi wanted no part.

The acquisition of Golden West at the height of the housing bubble made Wachovia the largest holder of option ARMs, which are prone to default because their principle payments reset at higher levels over a specified period of time. The risk involved with taking on Wachovia’s entire asset portfolio was apparently too much for Citi to stomach.

“Following several days of negotiations, we continued to have dramatically different views regarding risks involved in the transaction,” Citigroup Chief Executive Officer Vikrim Pandit said in a memo to employees. “As I said from the beginning, Citi does not need to do this transaction. We were willing to pursue it only if we could limit the risk and generate value for shareholders.”

However, by agreeing to take on those risky assets, Wells Fargo will become the largest U.S. bank by branches, with 10,761 branches in 39 states. Also, more than half of Wachovia’s branches are on the East Coast, while Wells’ previous territory stretched from its home state of California to Texas and Minnesota. That gives Wells Fargo true coast-to-coast exposure, as well as $787 billion of deposits and $1.42 trillion in assets.

“It (the Wachovia deal) provides Wells Fargo with the opportunity to become a national banking franchise at a much lower cost than cobbling several one-off transactions together,” Stifel Financial Corp. (SF) analyst Christopher Mutascio said in a note to clients.

Meanwhile, Citigroup is left with the daunting task of trying to keep pace not only with Wells Fargo, but with JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC), which have struck deals of their own.

JPMorgan took over The Bear Stearns Cos. Inc. in March, and then in September paid $1.9 billion to the Federal Deposit Insurance Corp. (FDIC) for Washington Mutual’s deposits, retail branches, and loan portfolio. And Bank of America jumped in on July 1 to snap up the operations of dying mortgage leader Countrywide Financial Corp. and followed that up with the September acquisition of Merrill Lynch & Co. Inc. (MER).

Charles Carlson, a money manager at Horizon Investment Services LLC, told Bloomberg News that Citigroup missed a big opportunity to keep pace with rivals that have expanded by acquiring troubled institutions.

“The more Citi could beef up its operations and be part of the big bank club, the better,” Carlson said. “I’m not sure this is going to be viewed as good for Citi.”

Citi still intends to sue Wells Fargo for $60 billion in damages on the grounds that news of the competing bid caused its share price to significantly decline.

Source: Citigroup Concedes Wachovia to Wells Fargo

Luxury jeweler Tiffany & Co. (NYSE:TIF) yesterday followed in the footsteps of other high-end brands when it announced strong fiscal second quarter results.

Tiffany’s net income increased to $80.8 million, or 63 cents per share, in the second quarter, up from $40.5 million, or 29 cents, for the same period a year prior. It was enough to beat mean analyst expectations of 55 cents per share and sent Tiffany shares up 10%.

“Tiffany did a lot better than investors feared,” Schick, an analyst with Stifel Nicolaus & Co. (NYSE:SF), told Bloomberg News in a telephone interview. “Luxury isn’t getting a ton better, but it is hanging in there. People are going to remain concerned about what happens next, given the state of the global economy and the global equity markets.”

And there’s the rub. Luxury brands such as Tiffany, Hermes International SA (PINK: HESAF) and the Gucci Group NV (PINK: GUCG) have managed to grow sales despite a sharp slowdown in U.S. consumer spending. But growing economic troubles in Europe, traditionally the biggest market for luxury goods, are starting to weigh on the minds of high-end retailers.

And while luxury sales growth in emerging markets is on the rise, it may not be enough to offset the slowdown in the maturing markets of the United States, Europe, and Japan.

Some high-end retailers are struggling to come up with new ways of nabbing customers, while others are carefully implementing focused marketing campaigns that build on their core competencies.

Shares of luxury goods makers are no longer a sure thing, but there are still some profitable picks if you know what to look for, and just as importantly, what to avoid.

Selling Luxury

Many high-end retailers were convinced that sales of luxury goods would continue unabated despite slowing global economies. And at first, it seemed they were right. But as the fallout from the global credit crisis unfolds, the luxury market is starting to feel the pinch that its mid-level brethren are already familiar with.

The luxury industry has clocked in five straight years of strong growth that culminated with a 6.5% jump in 2007. At one time, luxury sales were expected to advance at an 8% – 10% clip over the next several years. But growth like that is no longer feasible in today’s tough markets.

Bain & Co. Inc. has ratcheted its forecast down to a 2% rate of growth for the $270 billion luxury market this year.

“I’ve done this for a long time, and this is one of the most volatile times I’ve ever experienced,” Angela Ahrendts, chief executive officer of British brand Burberry Ltd. (PINK: BBRYF), told Fortune.

“The good news is that the sector is still outperforming others over the next two years,” Ahrendts says. “It’s just a matter of getting through the storm by focusing on the right markets, the right suppliers, and the right categories. We’ve got to run a tighter, smarter business.”

Indeed, the future is bright for the luxury sector, particularly as demand picks up in emerging markets where rapid development has resulted in the materialization of a new client base.

Sales of luxury goods in Asia, excluding Japan, jumped 100% over the past ten years, increasing from $14.7 billion (10 billion euro) in 1997 to $29.4 billion (20 billion euro) in 2007.  But despite the rapid growth, that region only accounted for 12% of global luxury goods sales in 2007 – only slightly more than 11% in 1997.

For now, even with the impressive growth rates, emerging markets aren’t ready to pick up the slack for the wealthier West.

Stick With What Works

Luxury retailers are doing everything they can to boost flagging sales, but some just can’t get over the hurdle. A June survey by the Italian trade group Altagamma found that operating margins at many brands were flat or falling, Fortune reported. Slowing sales and shrinking margins have led some firms to try to reach out beyond their core customer base.

For many, it’s a costly error.

“The biggest mistake luxury brands make is in not sticking with their core value system and core customer,” Suzanne Hader, principal at 400twin, a New York-based consulting company that focuses on luxury goods, told Forbes.

American handbag maker, Coach Inc. (NYSE:COH) has carved out success for itself by selling $300 handbags. But a recent attempt to go higher-end with its Legacy line, with handbags that retail for $1,100 was not only unpopular, it alienated the company’s core customers.

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