Verizon in US$27-bil. Bid for Alltel

Reports have been confirmed by Vodafone that Verizon Wireless is bidding to take control of Alltel in a deal that will be worth in the region of US$27 billion, barely seven months after the completion of the leveraged buyout by private equity from TPG capital and Goldman Sachs (see United States: 29 October 2007: Alltel Sale Passed by FCC—With Conditions). Although details are sparse, Vodafone, which owns 45% of the United States carrier, has confirmed the talks: "Vodafone confirms that Verizon Wireless is in advanced discussions regarding the potential acquisition of Alltel Corp…There is no assurance that a transaction will be forthcoming." Various reports including from Reuters state that a price of around US$27 billion, including debt, is being discussed. This is in the region of the US$27.5-billion (including debts) paid by TPG and Goldman Sachs (GSCP). Some outlets such as Bloomberg quote "sources familiar with the matter" stating that TPG and GSCP would generate a "slight premium" on the sale. However, at the time prices were noted as possibly inflated by a booming credit-market bubble which has since burst (see United States: 21 May 2007: Alltel Goes Private for US$25 bil. from TPG and Goldman Sachs).

Outlook and Implications

Surprise Sale: Verizon was regarded as the carrier most likely to acquire Alltel when the sale was first floated but private equity houses, floating on the credit boom, became the only prospective buyers in a deal that attracted remarks about overpricing at the time (see United States: 21 February 2007: Alltel to Review Strategy as Q4 Revenues Rise 14% and United States: 10 May 2007: Private Equity Lines Up for Alltel). The deal was expected at the time to see a turnaround period in the region of three to five years. At the time of the deal Scott Ford, chief executive officer of Alltel, commented, "TPG and GSCP are long-term investors who are willing to make the investments necessary to continue to grow our wireless business in all of our markets." A recent information release by Alltel reveals some of the reasoning behind the deal arriving now. Although operational performance was strong with net additions bucking a downwards trend and rising by 62.4% to 385,000, the interest on the loans accrued to finance the buyout raised interest payments from US$46.7 million in the first quarter of 2007 to US$496.5 million in the first quarter of 2008. This swung the company from a net income of US$230 million to a net loss of US$124.9 million (see United States: 16 May 2008: Alltel Revenues Up 11%, Boosts Net Additions by 62%).

TPG and GSCP may have been looking to take the debt-laden company off the books in the tight credit market, and Verizon will be able to finance the acquisition more economically. Verizon Wireless reported an operating income of US$3.26 billion in the first quarter of 2008 and the consolidated wireless/wireline company increased cash and equivalents by US$4.3 billion to US$5.5 billion over the first quarter. Vodafone has similarly been successful of late on growth in emerging markets, growing first-quarter Q1 earnings before interest, tax, depreciation and amortisation 10.2% to £13.2 billion (US$25.8 billion). Verizon will also generate synergistic savings through the merger of networks that again make the deal more viable, placing the potential acquisition on a firm financial footing. However, it will likely push Verizon Wireless into again delaying the payment of dividends, which it last year signalled would be the case until 2010—something that has already evoked the ire of Vodafone investors.

Overtaking AT&T: If completed, the deal would add some 13.0 million customers to Verizon's subscriber base, taking Verizon Wireless, which reported 67.2 million subscribers in the first quarter, to more than 80 million, compared with 71.4 million reported by the largest carrier AT&T in the same period. Verizon Wireless can also claim a larger percentage of high-value, retail contract customers, and before the first quarter of 2008 had been able to report higher revenues than AT&T despite the lower subscriber numbers (see United States: 13 May 2008: Running Backwards: Sprint Trails in Q1 Results). This illuminates potential regulatory issues. It is likely that some portions of the network—where Verizon already operates and competition is low—will see mandated divestments. The 2007 competition report found there are 3.6 competitors in rural areas where Alltel largely operates, compared with 5.5 in urban areas, making this a more weighty issue with regard to regulatory approval in any Alltel sale.

Network Footprint: The deal would also add Alltel's extensive network to Verizon's. Alltel widely advertises as the "nation's largest wireless network", operating in 35 states across the country and covering around half the land mass of the United States. Alltel mainly operates a CDMA network—the same technology as Verizon Wireless—but also overlay parts of the network with GSM equipment to capture roaming revenues in the largely rural areas in which the carrier focuses its operations. This would place the strategy for the acquisition in line with Verizon's earlier acquisition of Rural Cellular, for which Verizon noted it would maintain the GSM network to capture roaming revenues (see United States: 19 November 2007: Approval for Rural Cellular Acquisition by Verizon Delayed). This is helped by moves towards modularisation of network equipment (see World: 4 April 2008: Vendors Pitch for 700 MHz Business as Base Station Modularisation Helps Accelerate LTE Push). Verizon also plans a move to the GSM-based network evolution long-term evolution (LTE), so these networks will also coalesce on a single standard (see World: 20 September 2007: Verizon and Vodafone Target Convergence in Evolution of CDMA and GSM Standards).