UPDATE – Verizon Wireless confirms $28.1bn Alltel buy
5 June 2008
Update (5June08 1545 GMT): Acquisition now confirmed, at $28.1bn in cash and assumed debt, with both VZW and Vodafone scheduling related conference calls (Vf at 1700 GMT). Targeting synergies of $1.5bn-$1.7bn by 2011, with immediate EBITDA enhancement. VZW to hold annual “annual dividend review process”, with suggested delays for dividends to Vf running into 2011. Completion expected before the end of 2008, subject to regulatory approvals. Alltel said to have had Q1 FY08 revenue of $2.3bn and ARPU of $53.60 from 13 million customers.
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[1033 GMT] Verizon Wireless is negotiating a bid for Alltel, the number-five US mobile network, according to Vodafone, with media sources reporting that a firm agreement could be imminent. The deal-value is estimated at $27bn (£14bn/€17bn) and, with over 13 million customers, the acquisition of regional player Alltel would catapult VZW ahead of AT&T, on which it has been steadily closing, and return it to a clear market-leading position.
“ 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. ”
— Vodafone Group statement.
The Financial Times cited Christopher King, an analyst at Stifel Nicolaus, as saying that the VZW and Alltel footprints were largely complementary, and that a merger could save around $1bn in roaming costs. Alltel is said to have operations focused on small- and medium-sized cities, and to rely on roaming agreements with VZW and Sprint Nextel elsewhere.
“ Put simply, they can run Alltel more efficiently than Alltel can. It takes a strong wireless franchise, and increases Verizon’s exposure to wireless which is the best business in their portfolio. It lets them exercise their advantages of scale to run the business. ”
— Craig Moffett, analyst, Bernstein.
Most of the value of a deal is expected to relate to debt carried by Alltel, which is said to be in the region of $23.35bn. A price of $27bn would apparently value the operator at around eight-times earnings before interest, tax and depreciation; a lower multiple than the private equity players paid in 2007.
Currently, both VZW and AT&T are plus or minus a few million of the 70 million customer mark, and acquisition of Alltel would take VZW to around 80 million, compared to 72 million for AT&T.
- Alltel Corporation recorded revenue of $8.8bn in 2007, on which it earned £183m, and the company is generally described as well run and innovative. It is based in Little Rock, Arkansas and employs over 15,000. With fixed-line roots going back to 1943, Alltel reinvented itself in 2005 as a wireless pure-play (having launched mobile operations in 1992, which were built up since 1998 through a succession of acquisitions). Alltel was acquired in November 2007 for $27.5bn by a debt-funded private equity consortium of TPG Capital and Goldman Sachs Capital Partners. There is a general assumption that the vendors are now struggling under the debt load in the now much tougher capital markets; a situation that should also restrain the risk to VZW of a bidding war.
The move by Vodafone to confirm VZW’s interest in Alltel seems to suggest the activity has its blessing. This is important because, with expectations that a deal would be funded by debt, VZW may be obliged to delay resumption of dividends beyond 2009, while Vodafone has been confidently promising investors they will come back on tap from this date.
Vodafone’s shareholder rights at VZW are unclear, but it is definitely the much weaker partner, so it is questionable whether the Group has any real power to block an Alltel move, assuming it had the inclination. Conversely, it is also unclear whether Vodafone is in any position to extract concessions — such as guaranteed dividends — in return for giving its consent. However, it does seem likely that a transaction of this magnitude would trigger a Vodafone-favouring clause in any reasonably-crafted shareholder agreement.
For VZW, this is just its latest flexing of muscle, having itself been built partly though acquisition and recently indulging in multi-billion dollar transactions to snap up smaller players and bag the lion’s share of premium national spectrum auctioned by the federal government.
Commentators are considering the likelihood of an alternative bidder for Alltel emerging, notably AT&T. However, this seems relatively unlikely because, like VZW, Alltel utilises CDMA network technology that is incompatible with the GSM-oriented infrastructure of AT&T (and number-four player T-Mobile USA). As such, a move by a GSM player would be more technically challenging, costly and risky (problems that have crippled Sprint, following its acquisition of Nextel); thus negating the benefits available to VZW. Meanwhile, Sprint Nextel, the number-three player and another CDMA operator, is in such operational and strategic distress that it is considered more prey than predator.
While an Alltel deal is sure to receive regulatory scrutiny, it should be approved because VZW will by no means gain national market dominance and will have three large national competitors, although it may be required to make adjustments in specific local markets. A more difficult question is whether the authorities would permit market consolidation to three major players, should Sprint Nextel come into play — and uncertainty on this question could force Deutsche Telekom’s hand, should it fear its T-Mobile unit being left under-scale, leading to additional bidders for either or both Alltel and Sprint Nextel.
Comment: further consolidation increases focus on Vodafone’s VZW stake
Further consolidation of the US mobile sector would reduce Vodafone’s leeway in the market, where it currently has options of maintaining the status quo; acquiring VZW (either from or via Verizon); or exiting VZW and going it alone (such as snapping up a smaller player). While Vodafone professes to be comfortable as the junior partner in the strong and growing VZW, presumably biding its time in the hope of gaining the opportunity to take control, investors are at times less sanguine about holding so valuable a passive investment. Following an Alltel acquisition, VZW conceivably has an enterprise value in the region of $180bn, which is more than the respective market capitalisations of each of its owners, and would give the Group’s stake a value of over £40bn before debt adjustments (around half Vodafone’s own market capitalisation). Further, the ‘land grab’ growth in the US market has been predicted to slow within two to three years, meaning that VZW may start to resemble a more mature, utility-style asset akin to Vodafone’s Western Europe operating companies.
[Financial Times, 4 June 2008; Bloomberg, BusinessWeek, Daily Telegraph and Vodafone Group, 5 June 2008.]
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