Global Insight Perspective | |
Significance | After an extended period of speculation, Alltel has agreed to sell to private equity, with TPG and Goldman Sachs Capital Partners agreeing to a price tag of US$27.5 billion, including debt, subject to approval by shareholders and regulators. |
Implications | The competitive landscape will not be changed by this buy-out and the resultant management change does not appear to threaten in the near-term. |
Outlook | Despite assurances that the investors are in for the long haul, it is likely that the company will return to the market in several years when conditions are more favourable for a strategic buyout by a competitor. |
Alltel, the fifth-largest wireless carrier in the United States, has reached an agreement with TPG Capital and GS (Goldman Sachs) Capital Partners to buy out the company and take it private. Alltel has around 12 million customers and an extensive rural network across 35 states, mainly in the midwest and south-east of the country. They are offering US$71.50 in cash per share, a 9.4% premium on Friday's closing price of US$65.35, or 23% up on the year-end 2006 price prior to speculation of a sale. This will value Alltel at around US$25 billion, or US$27.5 billion including assumed debts. The transaction is expected to close in the fourth quarter of 2007 or the first quarter of 2008, subject to a shareholder vote and regulatory approval.
A number of private equity players had lined up in the bidding for Alltel, including Providence Equity Partners and the Blackstone Group, the Carlyle Group and Kohlberg Kravis Roberts & Co, and the successful TPG Capital and Goldman Sachs (see United States: 5 March 2007: Alltel Positions Itself for Sale and 10 May 2007: Private Equity Lines Up for Alltel). Competing wireless carriers were less receptive as it proved to be either a strategically inopportune moment for them to consolidate further or technically sub-optimal (see United States: 21 February 2007: Alltel to Review Strategy as Q4 Revenues Rise 14%). While a rival bid could still emerge and with some commentators viewing the offer as a relatively good deal, the price is at the top end of expectations, making a counter bid less likely.
Scott Ford, chief executive officer (CEO) of Alltel, commented, "TPG and GSCP are long-term investors who are willing to make the investments necessary to continue to grow our wireless business in all of our markets. This transaction also ensures our customers can continue to rely on Alltel to deliver high-quality service and leading edge products and services.”
Alltel has been performing fairly well since spinning off its wireline arm. Non-core operations were divested as the company positioned itself for sale, building revenues by 14% and income for current businesses by 51% in the fourth quarter of 2006 through organic net subscriber growth of 228,000 and a subscriber increase of 433,339 through the acquisition of Western Wireless, thus growing the subscriber base by 11% year-on-year (y/y).
Outlook and Implications
A buyout by a private equity player does little to alter the competitive landscape and, with a reasonable performance and no indication that management will undergo significant restructuring, the strategy of the last year looks set to continue on its current course. Alltel has made a number of acquisitions over the last few years and appears to be interested in gaining access to investment funds, which would help it to continue hoovering up small players (see United States: October 3 2006: FCC Approves Alltel Acquisition of Midwest Wireless; 11 January 2005: Alltel Acquires Western Wireless for US$6bn; 2 December 2004: Alltel to Acquire Further Cellular Assets; and 29 November 2004: Cingular Wireless Agrees Asset Sales to Alltel to Clear Path for AT&T Wireless Deal). Alltel claims to have the largest network in terms of area coverage in the U.S., generating a significant portion of revenue from other carriers roaming on its network, which includes CDMA and some GSM assets. However, the main carriers are becoming less reliant on roaming services as their own networks continue to expand.
As described by Scott Ford, who noted the companies’ ability to fund investments, Alltel may well be pushing to add investment options through these partners, which would give it enough scale to become a truly national operator. However, this may not be a viable long-term strategy for the new owners. They are likely to look to consolidate existing operations, generate cash returns that will pay down the debt raised to acquire Alltel, and sell up either in part or in entirety to a competing carrier with an eye on the rural service footprint at a more opportune moment.