Technology

Verizon, Alltel Make a Connection


With a Verizon-Alltel deal, the wireless industry is poised for a new round of mergers—and declining competition

Verizon Wireless is buying Alltel in a $28.1 billion deal that would create the nation's biggest cell phone provider with more than 80 million users, vaulting past AT&T's customer base of 71.4 million.

Cost savings from the deal announced on June 4 could reach $9 billion, with the first $1 billion realized in the second year after the deal closes. The savings would come in part from job cuts and a reduction in the roaming fees that Verizon Wireless pays when its customers use their phones on Alltel's network.

T-Mobile-Sprint Next?

Verizon Wireless will pay $5.9 billion and assume an estimated $22.2 billion from Alltel. The companies expect to complete the transaction by the end of 2008.

At $28.1 billion, including assumed debt, the deal would barely exceed the $27.5 billion price tag paid for Alltel just last year by an investing arm of Goldman Sachs (GS) and TPG Capital. The decision to sell the asset so quickly, and for so little profit, may point to the continuing struggles of the private equity market, which came to a screeching halt last year as the mortgage crisis hit.

If the deal goes through, "private-equity players would be exiting without making any money on this," says Peter Rhamey, an analyst with BMO Capital Markets. "Private equity is having a hard time right now. One year later, presumably Alltel has grown. You are buying something that's grown for the same price."

The Verizon-Alltel agreement comes just weeks after reports that the parent company of T-Mobile may be eyeing a buyout of beleaguered Sprint Nextel (BusinessWeek.com, 5/5/08)—suggesting the U.S. wireless industry may be poised to enter a new round of consolidation and decreasing competition after a pause of several years. The industry's last two big mergers came in 2004, with the combination of Cingular Wireless and AT&T Wireless, and then a year later with Sprint's buyout of Nextel.

Little overlap

While the AT&T (T) deal created a thriving business despite some early speed bumps, the Nextel deal has failed on almost every level for Sprint (S). Nextel's customers, once the envy of the business as the most loyal and highest spending, have been fleeing in droves due to network congestion and interference issues.

One aspect of Sprint-Nextel's ongoing stumbles may bode well for a Verizon-Alltel deal. Nearly three years after they merged, Sprint and Nextel customers still use phones based on different wireless technologies that connect with different cellular networks, preventing some of the operational efficiencies and savings that companies seek in combining two businesses. Verizon and Alltel, in contrast, both use the same wireless technology, known as CDMA, which should facilitate a smoother integration.

If Verizon's (VZ) buyout of Alltel wins regulatory approval, and then Deutsche Telekom (DT) moved to combine its T-Mobile USA operation with Sprint, the nation would be left with just three national wireless providers, down from six earlier this decade. And with Sprint struggling mightily, even a combination with T-Mobile might leave that business an also ran. Alltel has about 13 million customers, while Verizon counts 67.2 million. "A deal like this would make Verizon somewhat bigger than AT&T. It's looking, more and more, that there's the Big Two and everyone else," says Julie Ask, an industry analyst for Jupitermedia (JUPM).

Though regulators might frown on the potential loss of competition, some analysts noted that Verizon's and Alltel's networks don't overlap in many markets. "They are good roaming partners," says Rhamey at BMO. Verizon's announcement noted that Alltel serves "57 primary rural markets that Verizon Wireless does not serve." Still, Jessica Zufolo, an industry analyst for Medley Global Advisors, suggested the Federal Communications Commission might force the companies to sell off some of their licenses to use public airwaves. "There's going to be a lot of scrutiny, there might be some divestitures," she says.

Verizon Wireless, owned jointly by Verizon and Vodafone (VOD), was advised in the negotiations by Morgan Stanley (MS). Citibank (C), Goldman Sachs and RBS advised Alltel's current owners.

With Olga Kharif in Portland, Ore.

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