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No More Call Waiting: Verizon To Buy Alltel


Phone companies in takeover talks.


Midway through the trading day Wednesday Wall Street was buzzing about news -- and several media outlets were reporting -- that Verizon Wireless, the well known phone company, was in talks to buy wireless carrier Alltel. Verizon Wireless is jointly owned by Vodafone (VOD) and Verizon (VZ).

CNBC corroborated the rumors, saying:

Verizon is deep in talks to acquire Alltel, the nation's fifth largest wireless carrier, for roughly $27 billion, people close to the talks have told CNBC. Verizon has long been looked at as the ultimate purchaser of Alltel, but failed to bid when the company was auctioned in the spring of 2007. According to people involved in that auction, Verizon believed Alltel's valuation was too high.

So why now? It was less than a year ago that Alltel went private (TPG Capital and Goldman Sachs Capital were the suitors) and Verizon essentially took a pass. What about the current circumstances suddenly make it a good pickup? Perhaps Verizon was intrigued by reports that suggest Alltel's revenues grew by a respectable 11% in the first quarter and that it added close to one million new subscribers in the period. That's a roughly 26%.

Now, the CNBC article points out that Verizon would pay about eight times EBITDA, just below the roughly 9.2 times EBITDA Alltel was reportedly bought out for. Eight times EBITDA is decent, but it doesn't exactly exude value, nor does it seem like that much more of a deal than it was before. It stands to reason that in this environment, especially through its leverage, Verizon would be able to extract a better bargain out of those private equity types.

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Another question is, if Goldman Capital and TPG are looking to unload so quickly, is there a problem that we don't know about? That's hard to evaluate, but nonetheless something to keep in mind. If anything, Verizon would be well served to use their haste as a bargaining chip to secure a better price.

Next, at give or take $27.5 billion Alltel is no small fish. There's a lot that could potentially go wrong. The roughly $23 billion Reuters reports Alltel sports in debt comes to mind.

And what of the potential for cost savings and synergies? Logic dictates that when you combine two entities of this size, there's bound to be some overlap. At the same time, however, ridding two merged companies of overlapping staff and assets can be costly, especially when you consider severance pay and write-downs. Before dropping my gavel in judgment, I'd like a sense of what this could mean in terms of dollars and cents.

Finally, if the two parties do wed, the antitrust set will probably want to have a little chat, which adds yet another variable to the equation.

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No positions in stocks mentioned.

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