It's a pretty lousy time to be in the local phone business anyway -- but the credit crunch isn't helping phone companies with their best hope for survival: Consolidation.

Embarq (EQ), the fourth-largest U.S. phone company, which Sprint (S) spun off in 2006, has been trying to sell itself for weeks, the Wall Street Journal reports. But those plans are tabled for now because potential partners -- like smaller Windstream, the fifth-largest phone company -- haven't been able to raise capital for a deal. WSJ:

Market conditions are getting in the way of deals, as the credit needed to finance a major acquisition is largely unavailable. "If there was a deal out there, there's no access to capital, not just for Windstream, but for anyone," said Windstream Chief Executive Jeff Gardner in an interview. "The reality is there's not going to be a lot happening with respect to M&A until this gets resolved." He declined to comment on whether Windstream was eyeing Embarq.

Why is consolidation so important? Because most small-to-mid-size phone companies are either shrinking now or soon will be. Analysts expect Embarq's Q3 revenue to decline 3.7% year-over-year to $1.53 billion, and in August it said it would cut up to 700 jobs.

And while massive telecom giants AT&T (T) and Verizon (VZ) have big wireless businesses, are rolling out digital TV services, and sell services to enterprise customers around the world, most phone companies are just that -- phone companies. And business isn't exactly booming: Many customers are hanging up on old-school, copper landline service to go wireless-only, or to buy Internet phone service from their cable company. And while selling DSL Internet service boosted growth for a while, most new customers are signing up for faster, cable Internet service.

So phone companies -- still generating a lot of cash -- have two options: Grin and bear it until they turn to dust -- or buddy up with each other to try and benefit from scale.

See Also:
Cable-Telco Price War Brewing As Broadband Growth Tanks
Verizon's FiOS A $6 Billion Bomb? Sure Beats Bankruptcy
Cable Broadband Growth Beats Telcos 3-To-1 In Q2