CenturyTel (NYSE: CTL - News) is set to buy larger rival local telephone carrier Embarq for more than $5bn in stock, in a deal that marks a significant step toward the long-awaited consolidation of US regional phone service providers, according to people close to the transaction.

Kansas-based Embarq, which was spun off from Sprint in 2006 following Sprint's takeover of Nextel, started talking to potential suitors back in August and launched a small auction to sell itself to one of a handful of rivals soon afterward, according to people close to the sale process.

That process was scuttled, however, when the financing markets locked up in September and several potential suitors found themselves unable to raise the capital necessary for a takeover. Embarq's shares sank from more than $48 in early September to less than $30 at the end of last week.

But CenturyTel, which has a market capitalisation of $3bn compared to Embarq's now-shrunken equity value of $4.24bn, found it held an advantage as one of the only bidders willing to go forward with an all-stock deal, according to a source close to the process.

CenturyTel's board of directors were understood to have met to approve the transaction late on Sunday evening, following a handshake deal struck by the parties earlier in the day. An announcement on the deal, which assigns Embarq an enterprise value of about $12bn, is expected later on Monday.

The merger could spur further consolidation by other US local phone carriers, who feel the cost savings that could come from increased size and scope would better help them compete against giants Verizon Communications and AT&T. The delineation between potential buyers and sellers in some cases, however, is still murky.

Arkansas-based Windstream has been one of the more aggressive companies in the sector as it relates to searching for acquisitions, for example. Companies including Frontier Communications and Consolidated Communications, on the other hand, have been more frequently viewed as targets, and their shares have been valued more richly by the public markets for that reason, industry sources said.

The credit crunch has limited potential acquirers' access to capital across nearly all industries, however, which could stall activity in the telecommunications sector in the near term.