Verizon Communications is near a deal to buy Alltel for about $27 billion, including the assumption of debt. Vodafone, Verizon’s partner in its wireless business, confirmed the talks in a short statement Thursday, which said Verizon Wireless was in “advanced discussions regarding the potential acquisition of Alltel.”
The deal would catapult Verizon’s wireless business ahead of AT&T Wireless, which would fall to No. 2, followed by Sprint Nextel and Deutsche Telecom’s T-Mobile. A combination of Verizon, based in New York, and Alltel, based in Little Rock, Ark., would have more than 80 million subscribers. Verizon would add coverage in Midwest and the South.
The transaction would represent one of the quickest flips in corporate history: Alltel’s owners — TPG, formerly the Texas Pacific Group, and Goldman Sachs’s private equity arm — just completed buying the company last fall for about $27.5 billion.
The deal appears to be driven in part by Goldman Sachs and several of the large banks that financed the original deal seeking a way out of it. Citigroup, Barclays, Royal Bank of Scotland and others were never able to sell all of the debt, which was sitting on their own books at a loss.
Verizon is expected to pay about the same price that TPG and Goldman Sachs did last year. In an unusual twist, while the equity holders — TPG and Goldman — are expected to receive a small premium for their shares, some debt holders will sell at a discount, albeit at a higher price than the debt would fetch on the market.
Verizon Wireless executives declined to comment. Alltel executives did not return calls seeking a comment.
Verizon and Alltel have been in a merger dance for years. Lowell C. McAdam, chief executive of Verizon Wireless, and Scott T. Ford, Alltel’s chief executive, have known each other for a long time and have been talking on and off about a combination over the last couple of years, according to a person apprised of the talks. Rumors surfaced in 2005 that Verizon and Alltel were considering a merger and talks reignited last year, before TPG and Goldman Sachs bid for the company.
Previous efforts to strike a deal faltered in part because of opposition from Verizon’s partner in its wireless business, Vodafone, which owns a 45 percent stake. Roger Entner, a senior vice president at IAG, a market research firm, said that the last time Verizon sought to acquire Alltel, Vodafone rejected the deal because the merger would have diluted its position in the combined companies. The current deal is being financed entirely by debt to avoid diluting Vodafone’s stake, people involved in the discussions said.
Analysts say that Alltel, which has about 13 million subscribers, is a logical fit for Verizon. First, they share the same cellphone technology, called CDMA, and second, Alltel has customers in regions not serviced by Verizon. The person apprised of the talks said there would be layoffs, but they would be largely limited to marketing, finance and other staff functions.
“You have to see it in context of how Verizon is trying to reinvent itself as a wireless versus a wireline company,” said Craig Moffett, a communications analyst at Sanford C. Bernstein & Company. “The more they do, the faster they do it, the better.”
Despite being privately held, Alltel files quarterly earning reports with regulators because it has some publicly held debt. The company reported a net loss of $124.9 million for the three months ended March 31, its first quarter as a private company. Many companies that have been taken private report net losses because of higher debt interest payments.
The price on Alltel’s publicly traded debt rose sharply after CNBC reported the talks on Wednesday afternoon. The company’s loans traded around 98 cents on the dollar, while bonds paying a 7 percent coupon that mature in 2012 shot up 12 cents, trading at about par, according to Standard & Poor’s Leveraged Commentary and Data.
Some analysts have questioned whether Alltel could continue to grow, given its buyout-related debt. The company reported nearly a tenfold increase in interest expense in its first quarter, to $496.5 million, from $46.7 million last year.
“While we believe the results were solid, the results did not address our main concerns about this company, and we continue to believe that the company’s smaller scale relative to its competitors and its high leverage mean that it will be disadvantaged in the long term,” Zhiping Zhao and Anna Basanskaya, analysts at CreditSights, wrote in a research note last month.
But unlike other companies that have been taken private, Alltel continues to pay certain bonds, known as pay-in-kind toggles, in cash rather than by issuing more notes. Issuing notes is sometimes seen as a sign of distress.
The decision by TPG and Goldman to sell their share in Alltel may also suggest what is in store as smaller, independent players find it harder to go it alone. “It makes you wonder what Goldman and TPG see which made them change their minds so quickly,” said Mr. Moffett, the analyst. “In the wireless industry there is no place for independence. It is the land of the giants.”
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