Kelly Teal, Contributing Editor

June 5, 2008

6 Min Read
Verizon Pushes for One More Mega-Merger with Alltel Buy

The Alltel Wizard, Chad and his gaggle of nerdy telecom rivals are likely out of a job now that Verizon Wireless plans to acquire the mobile provider that’s staked its reputation on being the anti-behemoth.

Verizon on Thursday confirmed rumors it’s buying privately held Alltel in a bid to create the largest cellular network in the United States and claim the most subscribers. Further, Alltel uses the same CDMA technology as Verizon. That all looks good for Verizon. On the other hand, the deal doesn’t seem so great for Alltel employees, or, some say, consumers, despite speculation Verizon will add an MVNO-like tier to its business model.

Talk of a Verizon-Alltel pairing emerged late on June 4 when the Wall Street Journal reported that Verizon was in “sensitive” meetings with Alltel. Hours later, Verizon said, yes, it’s snapping up Alltel, for $28.1 billion — $5.9 billion in equity and $22.2 billion in debt. That number’s not much more than what equity firms Goldman Sachs and TPG paid last year to take Alltel private. They forked out $27.5 billion. So Verizon has scored, even though, said Ovum analyst Jan Dawson, Alltel’s owners “probably thought they would raise the asking price considerably after taking the company private.”

But in a credit-crunched market, Goldman Sachs and TPG weren’t in a position to demand a premium, said Berge Ayvazian, chief strategy officer for research firm Yankee Group. “It’s not surprising that they were able to work out a deal with what you might describe as a relatively modest valuation,” he said.

Verizon’s Timing, Hurdles
The timing of the transaction also isn’t surprising. Several analysts agree that Verizon is trying to beat the clock — that is, push the deal through before the Bush administration leaves office. The FCC, led by Chairman Kevin Martin, practically has rubber-stamped every major telco takeover since 2005. Verizon stands to get “more favorable regulatory treatment under the current FCC than a theoretical Democratic FCC under a theoretical President Obama, so now’s the time to do this deal,” said Dawson.

Jessica Zufolo, a telecom analyst for Medley Global Advisors LLC, said the industry is expecting a less-friendly regulatory environment as of 2009, depending on who wins the presidential election. “Clearly, it is too soon to predict what will happen in November or even what the FCC may or may not look like next year,” she wrote in a June 5 memo to clients. “Either way, Verizon is not taking any chances and appears willing to assume the risks involved at this late stage in the year.”

Those risks include trying to close the deal by the end of the year, Zufolo explained. For that to happen, Verizon must file its license transfer application with the FCC before the end of June. After that, the FCC would start its six-month merger review period.

“If history is any guide for anyone who has followed the approval process for a merger or leveraged a buyout transaction at the FCC, achieving approval in six months is not common,” Zufolo said.

Plus, if the Department of Justice’s antitrust division needs to review the transaction, which it surely will, that will eat up even more time.

Other risks pertain to conditions that the FCC can impose on the transaction.

“Verizon will need to make concessions on issues they have largely resisted,” Zufolo said, such as specific network neutrality mandates and open-handset requirements for the C block spectrum; stricter buildout requirements in certain rural markets; concessions on early termination fees; and, possibly, spectrum divestitures.

Despite those predicted requirements, the chances of the Verizon-Alltel deal falling apart are slim, analysts say. So, Verizon is preparing to become the No. 1 wireless carrier in the United States. AT&T Inc. will fall to No. 2, since Verizon will be able to claim more than 80 million customers with the addition of Alltel; AT&T had 71.4 million as of its last quarterly report.

“This business is all about scale and AT&T has had an edge recently in that department,” said Dawson. Acquiring Alltel should “right the balance again, from Verizon’s perspective.”

Indeed, Verizon gets complementary geographic coverage and more roaming territory, Ayvazian said. And now that Verizon plans to use the Long Term Evolution (LTE) protocol to upgrade to 4G, Alltel’s network will receive that same improvement, he added. Alltel was struggling with how to migrate to 4G within four years, to keep up with its Tier 1 rivals — it no longer has to worry about that. But above all, Verizon took away Sprint Nextel Corp.’s obvious option for growth.

“We’ve been saying all along that one of the ways to move Sprint … would be for Sprint and Alltel to merge,” Ayvazian said. Sprint would have leap-frogged to the No. 2 spot, had it bought Alltel instead of Nextel. And considering Sprint’s woes, its desperate need for a competitive edge, “this is quite preemptive for Verizon to have stepped in front of Sprint.”

To that end, Medley Global expects Sprint to be one of the carriers that will fight the Verizon-Alltel move, alongside T-Mobile USA.

“This deal could rekindle their campaign to get the FCC to revisit the current special access pricing and provisioning regime that they view as unreasonable,” Zufolo said. “The FCC may be hard-pressed not to consider this issue.”

Alltel Subscribers, Execs
Another concern about the Verizon-Alltel combination is the effect on consumers. Verizon could alienate the Alltel base if it doesn’t play its cards right, said Ayvazian. Alltel has created a unique position by being “nimble and pesky,” he said, offering packages and features different from the larger carriers. Many a customer has chosen Alltel over the Big 4 for its emphasis on customers; Verizon, conversely, is network-centric, Ayvazian said.

“If Verizon’s smart, they’ll work to secure the Alltel subscribers before they complete the transaction,” he said.

There’s one big way to do that: spin off an MVNO of sorts — a separate brand riding the Verizon network. With 13 million people being forced to join the Verizon family, it makes sense for Verizon to “make up a new brand and create a bridge for them to become part of Verizon world,” said Ayvazian.

The MVNO could have characteristics — features, billing procedures or geographic coverage — that differ from the mainstream Verizon Wireless profile. It even could keep the Alltel name, Ayvazian said.

Another content-oriented approach to keeping the Alltel base is to bundle Verizon’s other services, including FiOS. Those would be more content-oriented.

He expects Verizon officials to include such approaches in presentations to regulators as a way to secure quicker approval.

In the meantime, Alltel executives are, like that white-bearded wizard, probably going to “disappear,” Ayvazian said. Layoffs also are sure to hit Alltel workers. “I expect there to be big cultural differences. I don’t expect much of the Alltel culture to survive.”

On the management side, leaders will get “nice parachutes,” while people on the operations side will remain until the networks are integrated, Ayvazian said. Indeed, after integration costs, Verizon expects to reduce capex and opex, with savings of $1 billion in the second year after closing.

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About the Author(s)

Kelly Teal

Contributing Editor, Channel Futures

Kelly Teal has more than 20 years’ experience as a journalist, editor and analyst, with longtime expertise in the indirect channel. She worked on the Channel Partners magazine staff for 11 years. Kelly now is principal of Kreativ Energy LLC.

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