Embarq (NYSE: EQ) emerged following the spin-off of Sprints Local Telephone business that became effective on May 17, 2006. Investors who held Sprint Nextel common stock on May 8, 2006, received one share of EQ stock for every 20 shares of Sprint Nextel common stock they owned. EQs assets and business now consist largely of those that comprised Sprint Nextels former Local Telecommunications Division and Sprint North Supply operations. EQ, headquartered in Overland Park, Kansas, is now the fourth largest local communications company in the United States (based on access lines) and provides services in 18 states which include many major metropolitan areas and rural markets. The customer base, market reach, competitors, network infrastructure and economics of the business vary widely among geographies. The total access lines are split even between metropolitan and rural markets.

EQ derived its 2008 revenue from two operating segments Telecommunications (93%) and Logistics (7%). However, due to the sale of the Logistics operation in 1Q 2009 to KGP Telecommunications, the companys continued operation now solely comprises its Telecommunications business. EQ provides regulated local communications services as an incumbent local exchange carrier, or ILEC, to approximately 5% of U.S. households, with approximately 5.55 million access lines at the end of the most recent quarter (with consumer and business access lines representing approximately 66% and 31% of the total, respectively). Florida, North Carolina, Nevada, and Ohio territories represent approximately 66% of EQs access lines. The company also provides local voice and data, high-speed Internet (1.45 million customers as of March 31, 2009), nationwide long distance, satellite video (310,000 subscribers as of March 31, 2009) and other services to customers within EQs local service territories. Additionally, EQ provides access to its local network and other wholesale communication services for other carriers.

INVESTMENT THESIS

Erosion in access lines persists as the company continues to face stiff competition from wireless operators and cable companies with recent triple-play (voice, video, and data) offerings to the consumer. Currently, approximately 75% of EQs business is exposed to cable competition, reflecting a significant increase from 40% in 2005. The company s switched access lines declined 9.8% in 2008 and line losses continued in the most recent quarter (EQ lost 144,000 lines in 1Q 2009 versus 120,000 lines a year ago). Access line erosion accounted for 70% of the year-over-year decrease in voice revenue (approximately $108 million or 10.5%) for the most recent quarter. The access line loss trend is likely to continue in 2009 as cable operators offering Voice over Internet Protocol (VoIP) services continue to add coverage in the company s territories (approximately 80% coverage registered at the end of 2008). The challenge for the company will be to retain its subscriber level and grow revenue with new services and expansion of its geographical reach. One initiative that will attempt to offset existing service challenges is the delivery of new video services. However, EQ will face a difficult deployment process as municipality approval is required in each intended local jurisdiction before offering video to subscribers. Similar regulatory hurdles have already hindered other telephone companies, including Verizon and AT&T, deploying video broadcast services.

For the past several quarters, EQ has been increasingly focused on promotional efforts for satellite TV, which the company has been marketing, in collboration with DISH Network, since 2005. The company is bundling Dish satellite TV as part of triple-play services to counter competition from cable TV operators who are estimated to control approximately 80% of all net new broadband additions in the U.S. Cable operators continue to dominate the U.S. fixed-line broadband market with nearly 55% share. Although EQ aims to boost customer growth by adding satellite TV as part of bundled offerings, the video infrastrucutre is part of Dish and, therefore, may not be capable of maximizing full margin retention that would be otherwise available from EQs own organic offering. To remain competitive and meet the customer need for high-speed, EQ needs to invest signifcantly to upgrade its infrastructure which may further strain balance sheet conditions.

Although the divestiture of Sprint Nextels local telephone business (EQ) unlocked value for Sprint shareholders and the companys aggressive dividend policy (the $2.75 dividend payout equates to approximtaley 6.3% yield) will entice investors to hold shares, much of the burden is now placed on EQ in terms of financial debt and the need to turn a mature operating business into one that becomes more robust. The highly leveraged balanced sheet is an issue that should be considered. At the end of 1Q 2009, the company had approximately $5.3 billion of total long term debt and only $95 million of cash and equivalents.

Lackluster performance for EQs rebranding of the Sprint Nextel MVNO wireless services has also been disappointing, forcing the company to discontinue this service. Weaker than expected cellular revenue and subscriber count led to this decision. An 8% year-over-year decline in quarterly operating revenue is partly due to the absence of wireless contribution coupled with the recent disposal of the companys Logistics business. EQ anticipates similar level of decline in revenues for the second quarter of 2009.

As a result of these factors, we believe EQs cash generation and earnings power may be offset by the companys limited growth prospects and the regulatory challenges, which we believe are negative factors that may impede higher valuations.

CTL to acquire EQ

The Company expects to receive the remaining 5 state approvals and FCC approval for the CTL merger in 2Q09.

On March 31, 2009, CTL and EMBARQ (NYSE: EQ) announced that CenturyTel’s pending acquisition of EMBARQ received approval from the Florida and Louisiana Public Service Commissions and the Illinois Commerce Commission. Florida, Illinois and Louisiana join Georgia, Minnesota, Mississippi, Nebraska and Ohio, where approval of the merger was previously announced.

On January 27, 2009, CenturyTel (NYSE: CTL) and EMBARQ announced that shareholders of both companies have approved all proposals related to the CenturyTel/EMBARQ merger. All of the vote results have been certified by the independent inspector of elections at each Company's special meeting of shareholders.

Earlier on October 27, 2008, CenturyTel, Inc. (CTL) and Embarq Corporation (EQ) announced a definitive agreement under which CTL will acquire EQ in a tax free, stock-for-stock transaction creating one of the leading communications companies in the United States.

Under the terms of the agreement, EQ shareholders will receive 1.37 CTL shares for each share of EQ common stock they own. The consideration will be worth $40.42 based on CTL’s closing price on October 24, 2008, representing a premium to EQ shareholders of approximately 36.0% over the Company’s closing stock price on October 24, 2008. The transaction reflects an enterprise value of approximately $11.6 billion, including the assumption of $5.8 billion of EQ’s debt. Upon closing of the transaction, EQ shareholders are expected to own approximately 66.0% and CTL shareholders are expected to own approximately 34.0% of the combined company. The parties expect the transaction to be accretive to CTL's free cash flow per share in 2010, the first full year following the expected closing.

KGP Telecommunications, Inc. to Purchase EMBARQ Logistics(TM)

On March 11, 2009, KGP Telecommunications, Inc., announced the completion of its acquisition of EMBARQ Logistics, the supply chain, distribution and deployment subsidiary of Embarq Corporation (EQ). The name of the company will be KGP Logistics. Terms of the sale were not released.

On January 29, 2009, EQ announced it has agreed to sell its supply chain, distribution and deployment subsidiary known as EMBARQ Logistics(TM) to KGP Telecommunications, Inc. KGP, based in Faribault, Minn., is a leading provider of supply chain services, telecommunication products and integrated solutions. The consummation of the transaction is subject to customary closing conditions and completion of financing arrangements.

As part of the transaction, KGP will provide certain logistics and supply chain services for EMBARQ's core telecommunications operation under a long-term commercial services agreement
 

On August 6, 2009, EQ will likely announce its 2Q09 earnings results.