Verizon snaps up Alltel

Steven Hartley/Ovum
09 Jun 2008
00:00

Verizon Wireless, the second largest US mobile network operator by subscribers, has agreed to acquire the fifth largest, Alltel, for $28.1 billion. Subject to regulatory clearance, the combined company will leapfrog AT&T Wireless to become the largest mobile operator in the US, with over 80 million customers and pro-forma revenues in 2007 of $52.7 billion.

A successfully completed deal would signal the end of an era for a company originally set up as an alternative to 'Ma Bell' in 1943. It would also further confirm the domination of the 'big four' (Verizon Wireless, AT&T, Sprint Nextel and T-Mobile). No other mobile operator in the US outside these four would have more than 6 million subscribers, and the big four would control 92% of US subscribers.

Consolidation has been rife in the US market, the absorption of Alltel by one of the larger players is little surprise. As a CDMA operator, and with Sprint Nextel focused internally rather than externally at the moment, Verizon Wireless was the logical option.

The timing is likely to be due to Alltel's private equity owners (TPG Capital and GS Capital Partners) looking for an exit after Alltel's failure to secure additional spectrum in the recent auctions.

This was its last throw of the dice to compete on an (almost) national level. Alltel didn't have deep enough pockets for the auction and came away empty-handed.

Therefore, it seems eminently sensible that the private equity groups should cash in their investment before Alltel's failure to compete with the big four had too negative an effect on the value of their investment. There is also the political perspective: that a change of regime in the presidential elections later this year could diminish the chances of regulatory approval.

For Verizon Wireless the deal would make sense due to the sheer scale that the enlarged company would provide. As the US economy struggles so scale becomes increasingly important, and this deal would certainly provide that for Verizon Wireless. Verizon expects total synergies to reach $9 billion after integration costs, and with both operating CDMA networks these synergies should be substantially easier to achieve than they were for Sprint Nextel, for example.

In addition, the deal does nothing to undermine Verizon Wireless's decision, taken at the end of last year, to adopt LTE as its network evolution path. Therefore, Vodafone's intention of operating a single technology platform across its global holdings is unaffected. This can only help to drive further synergies in the future.

Outside those involved, the deal would also be a sign that the "big four" is becoming the "big two + two". With this deal Verizon Wireless and AT&T are breaking further away from Sprint Nextel and T-Mobile. Can the third and fourth placed players remain competitive‾

Sprint Nextel is clearly wounded and a reliance on Wimax as its future technology is failing to convince investors. Its future looks pretty bleak.

T-Mobile has been performing well recently and the US has been propping up Deutsche Telekom Group's performance for the past couple of years. However, rumours continue that Deutsche Telekom wants to purchase Sprint Nextel, which would give the combined company as many subscribers as the combined Verizon/Alltel.

Nonetheless, as we discussed in our piece Sprint gets its WiMAX deal but rumours continue to swirl, T-Mobile USA would be best-served sticking to its current strategy of mainly organic growth supplemented by adding to its footprint, such as through its SunCom purchase.

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