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Verizon Wireless must be glad not to have answered the call. It chose to avoid a possible bidding war for Alltel in the waning days of the buy-out boom, in spite of seeing a nearly perfect strategic fit with the regional carrier. Barely a year later, private equity groups TPG and GS Capital Partners were only too happy to sell it on with their hides intact, while Verizon Wireless is buying it for a more attractive valuation. If not for a further leg down in the credit crisis since their agreement in June, its timing could not have been more fortuitous.
There was some speculation Verizon Wireless might try to exit or renegotiate the deal, but it was wise to avoid dragging its feet. It was able to get final approval from the Federal Communications Commission on election day, avoiding what could have been a long bureaucratic delay and possibly tougher conditions by waiting for the Obama administration. The combination will vault Verizon back into the top spot in the US with about 84m mobile subscribers, passing AT&T with 75m. Sprint Nextel has 51m, while Deutsche Telekom’s T-Mobile has only 31m.
In spite of some concern about assuming Alltel’s borrowings in such uncertain times, the risks seem manageable. The $28bn enterprise value comes to a reasonable $2,100 per subscriber or about 8 times unlevered cash flow. The combination of complementary geographic reach and compatible technology platforms should allow cost savings that the companies have estimated as having a net present value of $9bn. Regulatory approval did come with some costs such as extension of roaming agreements with other rural carriers and divestiture of 105 markets in 22 states, but these are not too onerous and the latter will generate a few billion dollars in proceeds.
It is good to be number one again, but even better to have done so at the right price.
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