Private Equity Dials Up Alltel

Shares of the wireless telecom company climbed Monday after it agreed to a buyout offer from TPG Capital and a unit of Goldman Sachs

Alltel Corp. (AT) shares shot up to a new 52-week high May 21 after the wireless telecommunications operator agreed to be acquired by TPG Capital (formerly Texas Pacific Group) and GS Capital Partners (a subsidiary of Goldman Sachs [GS]) for $27.5 billion.

On May 20, the telecom company said the cash purchase of $71.50 per share is a 23% premium over Alltel's closing share price prior to media reports of a potential transaction published on Dec. 29, 2006 (see BusinessWeek.com, 12/29/06, "Private Equity Reportedly Circles Alltel"). As part of the deal, TPG Capital and GS Capital Partners also agreed to take on Alltel's $2.7 billion in debt. The transaction is expected to close by the fourth quarter of 2007 or the first quarter of 2008, after getting the necessary approvals.

"This transaction delivers substantial and certain value to our shareholders while providing the company with long-term partners who share our commitment to our customers, employees and the communities we serve," said Alltel CEO Scott Ford in a press release. He added that TPG Capital and GS Capital Partners "are willing to make the investments necessary to continue to grow our wireless business." Ford said: "This transaction also ensures our customers can continue to rely on Alltel to deliver high-quality service and leading edge products and services."

Alltel, based in Little Rock (Ark.), has 12 million wireless customers, making it the fifth largest wireless operator by number of customers. It serves mostly rural markets in the Midwest, West and South. One of the company's successful plans is "My Circle," which lets users call 10 numbers on any other network for free. Other carriers have copied this kind of plan.

Alltel shares jumped 7% to $69.94 in very heavy volume on the New York Stock Exchange. The shares touched a new 52-week high in early trading of $70.45.

"This private buyout is not a surprise to us, given the company's indication of interest and activity in December 2006," said Standard & Poor's analyst Ken Leon in a note on May 21. After reviewing the proposed deal, he said he raised his target price to $71 from $66, or 8 times his 2008 EBITDA estimate -- a slight premium to peer average of U.S. telecom service providers.

"As the fifth largest wireless carrier, Alltel has developed into a strong brand in suburban and rural markets," Leon said. Given the 10% upside potential to the proposed purchase price, he kept a hold recommendation on the stock. (S&P, like BusinessWeek.com, is owned by McGraw-Hill (MHP).)

Indeed, Wall Street has been embracing private-equity deals -- which has been one factor driving up the stock market as a whole lately. More telecom companies could be a target for private-equity investors, reports The Wall Street Journal. Sprint Nextel (S) has been a rumored target, but it has been losing subscribers and sports a high price tag (see BusinessWeek.com, 3/23/07, "Why $80 Billion for Sprint May Make Sense").