The news that Alltel (NYSE:AT) agreed to be acquired for $27.5 billion by Goldman Sachs and TPG Capital has the Street’s speculative juices flowing. The obvious thinking: if private equity buyers are panting for Alltel, maybe there are other targets they might go after.
That explains Monday’s jump by shares of Sprint-Nextel (NYSE:S), an eternal subject for the Street rumor mill (usually the rumored bidder is Comcast (NASDAQ:CMCSA), though the cable giant has repeatedly denied any interest in such a deal). A number of analysts writing on the Alltel deal Monday raised the notion that Sprint could also become a target.
Ric Prentiss, an analyst at Raymond James, theorized that the private equity buyers could decide to use Alltel as a roll-up vehicle for additional deals, “possibly making a run at national carrier Sprint-Nextel.”
Jason Armstrong, an analyst at Goldman Sachs, says the most logical alternative targets for private equity buyers interested in the telecom sector include Telus (NYSE:TU), BCE (NYSE:BCE) - and Sprint. In Sprint’s case, he writes that “size is the biggest limitation,” but adds that it offers “significant IRR potential, non-core assets to monetize and the most interesting turn-around story in telecom” (BCE has reportedly been in talks with several private equity firms).
Other analysts are more skeptical that Sprint would make a good target. “Although Sprint may seem enticing as it currently trades at a substantial discount to the Alltel takeover (7x EBITDA vs. Alltel’s 10x), we believe Sprint’s inferior fundamentals and size (triple Alltel’s) make it difficult for private equity buyers,” writes Prudential’s Richard Klugman. He also notes that Sprint’s enterprise value of about $80 billion is already nearly triple the Alltel takeout price. CIBC’s Timothy Horan likewise contends that Sprint’s size and near-term business challenges “would make it hard to complete a deal.”
Sprint Monday rose 61 cents to $21.40; the stock gained another 10 cents in after hours trading. BCE, meanwhile, rose 41 cents to $36.04.
S vs. BCE 1-yr chart: