Verizon Wireless To Buy Rival Alltel For $28.1 Billion

Verizon Wireless To Buy Rival Alltel For $28.1 Billion

Verizon Wireless leapfrogged AT&T (NYSE:T - News) as the nation's top wireless operator by agreeing on Thursday to buy privately held No. 5 Alltel, for $28.1 billion.

It won't have to pony up much cash: $5.9 billion, and that includes cash from Alltel's books. The bulk of the price comes from assuming $22.2 billion in debt.

If regulators approve the deal, Verizon Wireless would serve 80.4 million customers, including Alltel's 13.2 million. AT&T has 71.4 million mobile subscribers.

Verizon Wireless, 55%-owned by local phone giant Verizon Communications (NYSE:VZ - News) and 45%-owned by U.K.-based Vodafone (NYSE:VOD - News), said its debt will more than double to $38 billion with the Alltel deal.

Verizon Wireless' increased debt will delay the resumption of dividend payments to its co-owners until 2012, at least two years longer than projected. That may reignite calls from Vodafone shareholders for the world's top wireless firm by revenue to sell its stake in the joint venture, some analysts said.

Verizon Communications' stock jumped 5% Thursday to 38.96 after falling 1% Wednesday on talk of a deal. Vodafone's N.Y.-listed shares gained nearly 5% to 31.51.

Despite losing the top U.S. wireless spot, AT&T rose 2.5% to 39.46. AT&T could benefit from industry consolidation, analysts say.

Verizon Wireless pounced on a chance to buy Alltel from private equity groups that bought the mobile firm last year at the height of the credit bubble. TPG, formerly Texas Pacific Group, and Goldman Sachs' (NYSE:GS - News) equity arm bought Alltel in an auction for $27.5 billion.

Verizon Wireless, viewed as a possible Alltel buyer for years because the companies use the same network technology, bowed out of the 2007 auction.

Verizon Communications CEO Ivan Seidenberg said in a conference call that he jumped at this opportunity to buy Alltel after walking away from others.

"We passed on (Alltel) not once, not twice, but three times," he said. "We've always believed we were a natural partner (for Alltel) but we took a risk -- rather than overpay -- that there would be a better day. As it turns out, there's been a better day."

Seidenberg added that Alltel has been well-managed. Alltel has continued to grow customers and cash flow, making the rural mobile firm an attractive target, he says.

"Their EBITDA (earnings before interest, taxes, depreciation and amortization) is 10% higher than a year ago. This asset was sold for an EBITDA multiple of 9.2 and today, all-in, it's at 8.2 times."

Analysts say that while TPG and GS Capital Partners weren't distressed sellers -- TPG recently led a $7 billion injection of capital into Washington Mutual (NYSE:WM - News) -- banks that had financed the buyout deal wanted to get debt off their books.

Despite solid subscriber growth, Alltel's interest costs had jumped due to buyout-related debt, says Gimmiecredit.com. Verizon says it plans to refinance much of the Alltel debt at lower interest rates.

Of Verizon's $5.9 billion payment, roughly $1.4 billion will come from cash on Alltel's balance sheet.

The Verizon Wireless/Alltel deal comes just as Vodafone CEO Arun Sarin plans to leave. Sarin, who has expanded Vodafone into India, Turkey and other emerging markets, will step down in July.

Because of the structure of the joint venture, Verizon Wireless did not need Vodafone's approval to pursue the Alltel deal.

Sarin praised the Alltel deal on a conference call.

"The company has performed really well, with double-digit revenue and profit growth," he said. "The opportunity came up during the last few weeks for us to look at this asset again. There is a credit crunch aspect to this valuation which helps us compared to where values were nine months ago."

Vodafone received its last dividend payment, $585 million, from its U.S. venture in 2005.

Vodafone's U.S. Issue

Sarin's successor, Vittorio Colao, could face tough choices on its U.S. strategy, analysts say. Before the Alltel deal, analysts pegged the value of Vodafone's 45% stake at $60 billion to $70 billion.

Vodafone could launch an all-out bid for Verizon Communications. But it's not clear Vodafone holders "could stomach" a takeover, said one analyst who asked not to be identified. Vodafone's market valuation is $166.6 billion vs. Verizon's $111.1 billion.

Alltel added a record 385,000 subscribers in the first quarter, up from 237,000 a year earlier. "Alltel had been taking share for the past few quarters with aggressive pricing plans," said UBS analyst John Hodulik, adding that competitive pressure will ease with Alltel taken out.

More deals may be coming, analysts say. Germany's Deutsche Telekom (NYSE:DT - News), which owns T-Mobile, is eyeing Sprint-Nextel (NYSE:S - News). But Sprint's shares fell 5 cents to 9.20.

Sweden's TeliaSonera, meanwhile, rebuffed a $42 billion offer from France Telecom on Thursday.

Regulators may require Verizon Wireless to divest 20% to 30% of Alltel's properties because their networks overlap in many markets, Hodulik says.

Verizon Wireless is strongest in the Northeast and West Coast. Alltel is focused in the Southeast and Midwest.

With Verizon Wireless' size comes the ability to hammer out better deals for mobile phones and network gear, says Craig Moffett, analyst at Bernstein Research. "Verizon will be able to run Alltel cheaper than Alltel," he said.
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