It’s official: Verizon Wireless (VZ) will acquire rival Alltel Corp. for $28.1 billion of cash and debt. The deal will unload Alltel from the books of Goldman Sachs (GS) Private Equity and TPC Group who bought Alltel last year.
Alltel has performed well since being taken private, but Goldman and TPC had a lot of trouble selling its debt to other investors with the credit crisis in full swing. The acquisition will give Verizon the largest subscriber base in the U.S. with over 80 million customers (adding in Alltel’s 13.2 million subscribers).
This move will give Verizon a leg up in its race for dominance in the telecom sector versus its main competitor AT&T (T). Verizon and Alltel appear to be a good fit as both use the same network technology. Also, Verizon said that it expects $1 billion in cost savings in the second year after the merger, and the net present value of estimated savings is around $9 billion.
The deal comes amid speculation that the mobile phone business is already saturated, as 4 out of 5 U.S. consumers already have a cell phone. Furthermore, there are more than 3 billion cell phone service subscribers worldwide. With subscriber growth potential dwindling service providers are looking to other services to increase sales. So, the main driver for growth for telecom companies is to up sell existing clients plans that include extra features such as mobile web-browsing.
Verizon—with its $9 billion spent in the spectrum auction—intends to continue to offer the most cutting-edge services available. The other potential synergy is offering the 13 million former Alltel customers Verizon’s FiOS fiber optic television and internet services.
The deal will still need to be approved by regulators but, surprisingly, consumer advocates are not the least bit upset. "We'll ask for a careful review, but I don't see enormous antitrust problems," says Gene Kimmelman of Consumer Union.
It seems counterintuitive that consumer advocates would not be skeptical about a merger that limits customer choice and strengthens one of the two major players in the industry. After the deal goes through, Verizon and AT&T will claim more than two thirds of the industry. Sprint (S) and T-Mobile are alternatives but they are swooning as the behemoths seem to only get stronger.
The deal appears to be a win-win for both Verizon Wireless and Alltel’s private equity owners. For Verizon, this is an aggressive move to position themselves atop the wireless food chain by growing there subscriber base. The purchase price of over $28 million is only 8 times earnings, compared to the 9.2 times earnings that the private equity firms paid just last year.
For Goldman and TPC, the deal lets them off-load the stagnant debt that they incurred in the heavily leveraged bid last year. The question for the regulators to answer is will it be a win for the U.S. consumer?
Disclosure: none
