Verizon buys Rural for $2.67bn

Verizon Wireless, a joint venture between Verizon Communications and Britain’s Vodafone and the second-largest US mobile carrier, is to acquire Rural Cellular in a deal valued at $2.67bn that will expand its wireless service coverage in rural markets and add about 700,000 subscribers.

Ivan Seidenberg, Verizon’s chief executive, announced the deal on Monday as Verizon Communications unveiled strong second quarter earnings fuelled by Verizon Wireless, which added 1.3m net new subscribers in the quarter.

He said the acquisition, which includes $757m in cash together with assumed debt, will be made by Verizon Wireless and had been “enthusiastically supported” by Vodafone, which has until August 9 to decide whether to exercise a “put” option entitling it to sell Verizon Wireless shares worth up to $10bn to Verizon Communications. Vodafone’s stake is believed to be worth about $58bn, up from a valuation of $47bn last year thanks to Verizon Wireless’ stellar performance.

The Rural Cellular acquisition is subject to Rural shareholders’ approval and regulatory approval and is expected to close in the first half of 2008. It comes just weeks after AT&T, Verizon’s main rival, announced plans to acquire Dobson Communications, another leading rural carrier, for $2.8bn in cash. Both transactions highlight the growing pressure for further consolidation in the US wireless telecommunications sector as penetration rises and the major carriers seek to exploit economies of scale.

Verizon is also believed to have considered bidding for Alltel, one of the leading second-tier US wireless carriers, but decided against making an offer because it viewed the asking price as too high.

Alltel subsequently announced it had agreed to a leveraged buyout backed by TPG Capital and Goldman Sachs Capital Partners. Alltel’s shareholders are due to vote on that deal later next month. Under the terms of the proposed deal, Rural cellular’s shareholders will receive $45 per share in cash. The price represents a 16 per cent premium to the stock’s average closing price over the past 10 trading days and a 41 per cent premium to its closing price Friday of $31.88.

Minnesota-based Rural Cellular had 716,000 customers at the end of March.

“The addition of Rural Cellular’s markets will enable us to expand our services into areas where previously we had little or no presence,” said Lowell McAdam, president and CEO of Verizon Wireless.

Mr Seidenberg added that the deal is expected to generate more than $1bn in synergy savings through reduced roaming and operating expense savings. He said it will be neutral to moderately accretive in 2008 and accretive thereafter.

The deal came as Verizon Communications reported a 4.5 per cent increase in profits in the second quarter boosted by Verizon Wireless and Verizon’s expanding base of broadband and FiOS video subscribers.

Net income rose to $1.68bn, or 58 cents a share, from $1.61bn, or 55 cents, a year earlier. Excluding some costs, earnings were 58 cents a share, in line with expectations. Sales grew by 6.3 percent to $23.3bn.