Verizon to Buy Alltel, Form Top Wireless Carrier
Friday, June 6, 2008
Verizon Wireless agreed yesterday to buy the rural carrier Alltel for $28.1 billion, a deal that would vault Verizon past AT&T to create the nation's largest cellphone service provider, with 80 million customers.
The move is the latest in Verizon Wireless's recent aggressive push to expand. Verizon spent more than $9 billion in March on high-speed wireless spectrum auctioned by the Federal Communications Commission. A Verizon-Alltel partnership would widen the gulf between the giants, Verizon and AT&T, and their smaller competitors, like Sprint Nextel and T-Mobile .
Of the estimated 260 million cellphone users in the nation, Verizon Wireless serves 67 million customers and Alltel has 13 million. AT&T Mobility, the wireless arm of AT&T, has 71.4 million customers; Sprint has 53 million; and T-Mobile has 30.8 million.
The merger is expected to close by the end of the year, according to Verizon Wireless, but it must first pass federal regulatory reviews by the Justice Department and the FCC.
A key lawmaker and public interest groups yesterday cautioned that the combined company could hurt competition and limit choice for consumers.
"This proposed merger merits the utmost scrutiny by antitrust officials and telecommunications policymakers to ensure that competition and consumers are fully protected," said Rep. Edward J. Markey (D-Mass.), chairman of the telecommunications subcommittee of the Energy and Commerce panel.
Under the deal, Verizon Wireless would buy Alltel for $5.9 billion in cash and assume $22.2 billion in debt from the sellers, TPG, a private-equity firm, and an investment arm of Goldman Sachs. Verizon Wireless had previously tried three times to buy Alltel, the dominant rural carrier in the South and Midwest, but failed each time to agree on a price.
Analysts said the merger brings together two technologically complementary companies that would have reduced operating costs. Alltel runs on the same network technology, called CDMA, and generates about $9 billion in revenue a year. Verizon said it expects to save $1 billion in the first two years through administrative cuts and savings on roaming fees it had been paying to Alltel for using its network.
Through the merger, Verizon would tap into the 57 sparsely populated areas covered by Alltel.
"This is a perfect fit, with Alltel's high-value post-paid customer base, its solid financials, our common network technology," Ivan Seidenberg, Verizon Communications' chief executive, said in a statement. The Verizon Wireless unit has become the driving source of revenue at Verizon Communications, based in Basking Ridge, N.J.
Sprint Nextel, the nation's third-largest wireless carrier, has been bleeding customers since the merger between Sprint and Nextel in 2005.
"This deal will speed the unfortunate trend of giving consumers fewer rather than more choices in telecommunications services, while giving a few companies more control over the lives of consumers," said Gigi Sohn, executive director of the consumer interest group Public Knowledge.
To avoid antitrust concerns that the combined company would have an unfair dominance in some markets, Seidenberg said, the combined company would sell some of its spectrum holdings.
Some analysts said the merger could bring more choice for rural consumers, who would have access to Verizon's next-generation high-speed network, called Long Term Evolution. The technology promises uninterrupted streaming videos over cellphones and wireless videoconferencing on laptops.
The purchase could bring to a close Verizon's rocky history of attempts to buy Alltel. It was close to buying Alltel in 2005, but those deals failed because of differences over the purchase price. In a surprise move, Alltel was taken private by corporate investors TPG and Goldman Sachs's GS Capital Partners, which bought the company in November for $27.5 billion with the aim of expanding its dominance in rural markets.
The proposed sale of Alltel by the private-equity investors at nearly the same price they paid for it illustrates a continued tight credit environment and the pressure felt by investors to reduce their exposure to debt.
"You know the financial situation is bad when banks can't sell quality debt. This is a quality company with good cash flow," said Patrick Comack, a research analyst at Zachary Investment Research. "Verizon and Alltel both won by this deal. The only ones who lost were the private-equity guys."