By Kim Hart and David Cho
Washington Post Staff Writers
Tuesday, May 22, 2007

The competition to buy Alltel, the nation's fifth-largest wireless carrier, had been heating up for months, attracting some of the biggest names and deepest pockets in private equity. Then, late Sunday night, Alltel abruptly cut off the bidding two weeks early, agreeing to sell itself to two private-equity firms for $27.5 billion.

Some of the would-be buyers -- including a group led by the Blackstone Group and Providence Equity Partners and one led by the Carlyle Group and Kohlberg Kravis Roberts -- were taken by surprise by Alltel's decision, three sources close to the matter said. Citing a letter from Alltel, the bidders thought the auction was open until June 6.

"If you set up a bid date and you accept a deal early, you are by nature cutting people off," said one of the sources, who spoke on condition of anonymity because he was not authorized to talk about the deal. "There were a lot of people looking at this and spending their time and money on it, and they won't be too happy."

The deal, with TPG Capital and a private-equity arm of Goldman Sachs Group, represents the largest foray of private money into the telecommunications business to date and is among the biggest leveraged buyouts in history. If shareholders approve the sale, which is expected to close in early 2008, it would signal a major push by private equity into the highly competitive telecommunications industry.

Going private could also accelerate Alltel's dominance in rural areas, perhaps the last frontier for the wireless industry, which has saturated the profitable urban regions with cellphones. Alltel now would have two huge financial backers that can put the company on the fast track for growth in areas coveted by larger carriers like Verizon Wireless and Cingular.

Yet Alltel's move raised questions yesterday among some analysts who wondered whether the company acted too soon and left money on the table. But Alltel's management is so well regarded by Wall Street that many analysts gave the firm the benefit of the doubt.

"This management team has a lot of credibility with shareholders, and for them to come out and take a subpar offer would really be surprising," said Phil Cusick, who follows the company for Bear Stearns. "We don't know the whole story here."

Alltel defended the decision, saying it acted in the best interest of its shareholders. Spokesman Andrew Moreau said the company had set a date for the bids to close but left open the door for offers to come in earlier. "We made it clear to everyone in the process that if we got a bid that was fair, we were ready to move on it," he said.

Alltel received $71.50 a share; many analysts had predicted that the company would be hard-pressed to find an offer higher than $70. The offer represents a 23 percent premium over Alltel's share price in December when the media and analysts identified it as a buyout target.

"Selling out at that price was not a bad option," said Richard Klugman, an analyst with Prudential. "The average person in Washington or New York doesn't know Alltel. For Alltel to come into those markets, it would be an uphill battle just as the industry is starting to slow down due to maturation."

The Little Rock company was highly desirable because it is the dominant carrier for rural areas and other less-populated regions in the South, West and Midwest. The company has been aggressively expanding its high-speed data offerings over its wireless network -- perhaps one of the few ways to get high-speed Internet to far-flung places.

Alltel makes about 20 percent of its profit by charging roaming fees to other carriers, including Verizon and Sprint Nextel. When customers enter a rural area not covered by their carrier's network, they automatically connect to Alltel's network to make calls. Alltel collects a fee for that use.

Donna Jeagers, an analyst with Janco Partners, said Alltel, with its new backers, would be ideally positioned to expand its roaming service to give access to more carriers. That expansion could cost $100 million, but, Jeagers said, Alltel could make two or three times that amount in roaming fees every year.

The firm has long been considered an attractive takeover target with a well-managed leadership group, a business that generates a lot of cash flow and low debt levels. Verizon, which operates a compatible wireless network, had been interested in buying Alltel. But the telephone giant could not compete with the resources of private equity. Still, Klugman and several other analysts said, selling Alltel to Verizon could be part new owners' long-term strategy.

But none predicted that the buyout of Alltel portended more private deals in the wireless industry. Although the struggling Sprint has long been rumored as a potential target, the firm would probably be too expensive even for private equity, with a market value of $62 billion and debt of about $30 billion.

"The sheer size would be enormous and would take a huge consortium of players" to take Sprint private, Klugman said. He estimated that a buyout of Sprint would top $80 billion, three times the size of the proposed Alltel deal.

Alltel's shares rose $4.39 yesterday, to $69.60.