Global Insight Perspective | |
Significance | A bid has been agreed to merge Alltel's extensive, mainly rural network operations and 13 million subscribers with Verizon's operations, creating the largest network by footprint, subscribers and revenue. |
Implications | Regulators will demand some concessions, mainly likely to consist of asset disposals in overlapping markets. The degree of concessions demanded may be influenced by political factors. |
Outlook | Significant acquisition opportunities are running out, but the national GSM carriers are likely to examine the remaining options as market consolidation continues. |
Verizon Wireless has confirmed that it is to acquire the equity of rural wireless carrier Alltel for US$5.9 billion, which, with a projected total net debt on closing of US$22.2 billion, gives the deal an aggregate value of US$28.1 billion. The parties to the transaction—Verizon Wireless, Alltel and owners TPG Capital and Goldman Sachs Capital Partners—are aiming to complete the merger by the end of the year. The private equity investors paid a total of US$27.5 million including debt for the company in a deal that closed in November 2007. Since then, Alltel has recorded net losses of US$124.9 million in the first quarter of 2008 as payments on debts bit deep. Reuters reports that "sources close to the deal" surmise the buyout firms will make a US$1.3-billion profit, having invested US$4.6 billion for equity in the deal.
The same article notes that Verizon Chief Executive Officer (CEO) Ivan Seidenberg approached Goldman Sach's CEO, Lloyd Blankfein, several months previously and began full talks in the last few weeks. While Verizon initiated the approach, as noted yesterday, the sale was reportedly driven by the need to unload debt and greater difficulties in gaining financing to fund the long-term investments that had been envisioned by the private equity firms in the current difficult market for credit (see United States: 5 June 2008: Verizon in US$27-bil. Bid for Alltel).
Outlook and Implications
Market Overlap and Regulation
The information released notes that Alltel serves 13 million customers in 34 states, including 57 mainly rural markets that Verizon does not serve. Verizon's network currently covers a population of around 265 million out of the nation's 300-million populace. This footprint will benefit from expansion into rural areas, particularly in central and south-eastern states, which consolidation with the Alltel network will facilitate for Verizon. While Verizon does not have as extensive a network operating in these areas, with its heartland assets in the north-east and west coast, there is likely to be network overlap in some markets that will attract the attention of regulators seeking to maintain competition levels, which are notably lower in rural areas. There are 3.6 competitors in the rural areas where Alltel operates, compared to 5.5 in urban areas—early analysis by Dow Jones estimates that around one-quarter of Alltel's network overlaps with Verizon's.
With an election planned for November 2008 likely to come prior to the closure of the deal, it could potentially face a rougher ride from regulators if a Democrat win is achieved. Dow Jones notes that Republican FCC commissioner Deborah Taylor Tate is completing her term at this time and will be facing re-nomination with possible concerns over market dominance and roaming fees that will particularly irk Democrats (see United States: 8 August 2007: FCC Mandates Fair and Non-Discriminatory Roaming). Some overlapping network asset disposals are therefore likely to be mandated. These could include both CDMA and GSM assets as Alltel has operated a GSM overlay in some areas to capture roaming revenues.
Merger Benefits
Verizon Wireless expects to realise synergies with a net present value after integration costs of more than US$9 billion, driven by reduced capital and operating expense savings, such as roaming fees paid to Alltel. Synergies are expected to generate incremental cost savings of US$1 billion in the second year after closing. Verizon also notes that the deal will put the Alltel network on the path to LTE technology, with a deployment timescale of "the next several years", re-iterating its ambitions plans to begin deploying LTE around 2010. The merger will also expand the subscriber base to over 80 million, leaping past AT&T and adding value to the unlimited 'IN' network calling available with many of Verizon's plans.
Kick-start for Further Merger Activity?
Rivals will look to pick up assets coming to market from the mandated disposals following the regulatory review. In addition, this deal has the potential to trigger off a new round of merger activity, as was seen following the acquisition of Rural Cellular last year (see United States: 31 July 2007: Verizon Keeps on Climbing in Q2, Bids for Rural Cellular; 10 August 2007: Verizon Adds to Rural Assets in Kentucky and Oregon; 25 January 2008: Dobson Acquisition Helps AT&T Break 70 mil. Wireless Subscribers in Strong Q4; and 17 September 2007: Under the Spotlight—Wireless Consolidation in the U.S.). T-Mobile has recently been linked to Sprint-Nextel, although the technology mismatch and operational difficulties at Sprint make this a highly challenging and therefore less than likely scenario (see United States: 21 May 2008: T-Mobile Head Comments on Challenges for Sprint). More likely to attract attention from the national carriers are the smaller operators. CDMA operator MetroPCS (4.4 million subscribers) made an unsuccessful bid for Leap Wireless (3 million subscribers) last year, but the growing consolidation in the industry may spur further talks as the two fast-growing companies seek a stronger defensive position. However, with Verizon occupied by Alltel while the other CDMA carrier, Sprint, struggles operationally, they actually have little to fear from hostile approaches in the immediate future (see United States: 5 September 2007: MetroPCS Makes Bid For Leap Wireless). CDMA carrier US Cellular with 6 million subscribers is in a similar position. Beyond this, possible acquisitions fall under the 1-million subscriber mark, with companies such as Centennial (GSM, 700,000 subscribers), Telos (CDMA, 400,000 subscribers) and Cincinnati Bell Wireless (GSM, 600,000 subscribers) potential marks, with T-Mobile and AT&T likely to prey on the small GSM operators as the market consolidates.