Acquisition of Qwest

6 Months Ended

Jun. 30, 2011

Acquisition of Qwest

Acquisition of Qwest

(2)   Acquisition of Qwest

        On April 1, 2011, we acquired Qwest, and as a result Qwest became a wholly owned subsidiary of CenturyLink. We entered into this acquisition, among other things, to realize certain strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks. Each outstanding share of Qwest common stock immediately prior to the acquisition converted into the right to receive 0.1664 shares of CenturyLink common stock, with cash paid in lieu of fractional shares. We estimate that the aggregate consideration was approximately $12.273 billion based on:

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  the number of shares of CenturyLink common stock issued to consummate the acquisition of 294 million;

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  the closing stock price of CenturyLink common stock as of March 31, 2011 of $41.55;

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  the estimated net value of the pre-combination portion of share-based compensation awards assumed by CenturyLink of $52 million (excluding the value of restricted stock included in shares issued above); and

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  cash paid in lieu of the issuance of fractional shares of $5 million.

        We have recognized the assets and liabilities of Qwest based on our preliminary estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. We expect to complete our final determinations no later than the first quarter of 2012. Our final determinations may be significantly different than those reflected in our consolidated financial statements as of June 30, 2011. Based on our preliminary estimates, the aggregate consideration exceeds the aggregate estimated fair value of the acquired net assets and assumed liabilities by $10.005 billion, which has been recognized as goodwill. None of the goodwill associated with this acquisition is deductible for income tax purposes.

        The following is our preliminary assignment of the aggregate consideration based on currently available information (dollars in millions).

		April 1, 2011
Cash, accounts receivable and other current assets		$	2,036
Property, plant and equipment			9,525
Identifiable intangible assets
	Customer relationships		7,625
	Capitalized software		1,702
	Other		366
Other noncurrent assets			373
Current liabilities, excluding current maturities of long-term debt			(2,424	)
Current maturities of long-term debt			(2,422	)
Long-term debt			(10,253	)
Deferred credits and other liabilities			(4,260	)
Goodwill			10,005
Aggregate consideration		$	12,273

        The results of Qwest's operations have been included in our consolidated results of operations beginning April 1, 2011. Although our consolidated statements of operations for the three and six months ended June 30, 2011 included operating revenues (net of intercompany eliminations) of $2.746 billion attributable to the operations of Qwest, Qwest's post-acquisition operations did not contribute significantly to our consolidated net income. The following unaudited pro forma financial information presents the combined results of CenturyLink and Qwest for the three months ended June 30, 2010 and the six months ended June 30, 2011 and 2010, as though the acquisition had been consummated as of January 1, 2010.

	Three months ended June 30, 2010		Six months ended June 30,
			2011		2010
	(Dollars in millions except per share amounts)
Operating revenues	$	4,635		8,887		9,335
Net income	$	268		386		428
Basic earnings per common share	$	0.45		0.64		0.73
Diluted earnings per common share	$	0.45		0.64		0.72

        This pro forma information reflects certain adjustments to Qwest's previously reported operating results, primarily:

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  decreased operating revenues and expenses due to the elimination of deferred revenues and deferred costs associated with installation activities and capacity leases that were assigned no value at acquisition and the elimination of transactions between CenturyLink and Qwest that are now subject to elimination;

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  increased amortization expense related to identifiable intangible assets, net of decreased depreciation expense to reflect the fair value of property, plant and equipment;

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  decreased recognition of retiree benefit expenses due to the elimination of unrecognized actuarial losses;

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  decreased interest expense due to the amortization of an adjustment to reflect the fair value of long-term debt; and

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  the related income tax effects.

        The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at January 1, 2010, nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition (other than those realized subsequent to the April 1, 2011 acquisition date).

        As of June 30, 2011, we had cumulatively incurred expenses, consisting primarily of investment banking and legal fees, totaling $76 million to consummate the Qwest acquisition. We incurred $58 million of these expenses during the three months ended June 30, 2011, which are included in our selling, general and administrative expenses. During the same three month period in 2010, our selling, general and administrative expenses included $10 million of such expenses. Qwest also incurred $71 million in costs to consummate the acquisition, which are not reflected in these financial statements, $36 million in periods prior to being acquired and $35 million on the date of the acquisition. We did not incur expenses to consummate the acquisition in either of the three-month periods ended March 31, 2011 or 2010, so our selling, general and administrative expenses for the six-month periods ended June 30, 2011 and 2010, are $58 million and $10 million, respectively.