Economics, politics could force Verizon Wireless away from Alltel purchase
Analyst: Verizon may pay $500M break-up fee, then come back for better purchase price
October 10 2008 - 2:16 pm ET | Jeffrey Silva | RCR Wireless News
Verizon Wireless offered to divest another 15 markets as part its $28.1 billion play for Alltel Communications L.L.C., but the proposed transaction is becoming trickier by the day because of fluid economic, regulatory and political factors.
In a filing with the Federal Communications Commission, the No. 2 mobile-phone carrier said the 15 additional markets it would sell are located in Alabama, Arizona, Georgia, Iowa, Minnesota, Nebraska, New Mexico, North Carolina, South Carolina and Utah.
Verizon Wireless, after discussions with the Department of Justice, said in July it was willing to sell assets in 85 markets in order to address any antitrust concerns regarding the purchase of Alltel.
The deal, announced in early June, would have Verizon Wireless paying $5.9 billion in cash for Alltel and assuming $22.2 billion in debt. If approved by the FCC and DoJ, Verizon Wireless — a CDMA operator like Alltel — would pass AT&T Mobility as the nation’s largest cellular operator.
But hurdles remain, and time pressures are acutely looming for Verizon Wireless’ planned buy of Alltel. The Little Rock, Ark.-based company is the fifth largest mobile-phone operator and is owned by private equity firms TPG Capital L.P. and Goldman Sachs Capital Partners.
“We believe Alltel has a sense of urgency to close the deal for a number of reasons, including the desire by Goldman Sachs and TPG to exit the investment, the desire to avoid refinancing $7-8 billion in debt due this year, and the recognition that Verizon is the only viable purchaser at this time,” said analysts at Stifel, Nicolaus & Co. Inc. “This would support the recent reports that the credit-default swaps have doubled over the past two weeks, reflecting concern that Verizon may abandon its purchase of Alltel.”
Credit markets continue to be largely frozen even in the face a newly enacted $700 billion Wall Street bailout bill and global efforts to shore up shaky financial markets.
“As with everything these days, we cannot rule out the possibility that the credit markets could still be so locked up and that even Verizon cannot obtain credit to refinance the debt,” Stifel analysts stated.
The FCC and DoJ appear to be trying to wrap up their reviews of the Verizon Wireless-Alltel tie-up before the end of the year — before presidential and congressional elections whose outcomes have potential implications if final government action on the transaction gets delayed. A Democratic administration could apply even stricter scrutiny to the Verizon Wireless-Alltel deal.
Kevin Martin, chairman of the GOP-led FCC, could face intense pressure from the agency’s two Democrats — Michael Copps and Jonathan Adelstein — to impose conditions involving automatic roaming for voice and data, handset exclusivity arrangements, open access and net neutrality, rural upgrades and divestitures.
The Rural Telecommunications Group on Thursday complained to the FCC that Verizon Wireless recently offered only vague explanations on key matters such as “the long-term status of Alltel’s GSM network; Verizon Wireless’ unwillingness to enter into and/or extend voice and roaming agreements; and the complete chilling effect the proposed merger would have on new wireless broadband deployment in rural America.”
Because of Alltel’s $7 billion - $8 billion in debt due this year — the handling of which may be made difficult by the current economic climate — there could be even more impetus for the FCC’s Republican majority to act on the Verizon Wireless-Alltel deal sooner rather than later. For precisely that reason, FCC Democrats could gain added leverage to insist on a variety of conditions.
But what if merger conditions don’t sit well with Verizon Wireless?
“If the agreement is terminated as a result of Verizon Wireless not agreeing to restrictions or conditions that would meet the standards set forth in the definition of burdensome condition of divesting 2.4 million subscribers but would not result in aggregate divestitures in excess of 2.8 million subscribers, then Verizon Wireless would make a payment to Alltel of $500 million,” stated Fitch Ratings late last month, before Verizon Wireless’ latest divestiture offer. “A burdensome condition could also be triggered with divestitures of less than 2.4 million aggregate subscribers in the event aggregate negative effects would have a material adverse impact on the business of the combined company.”
Stifel analysts said such an outcome might not be the end of the story.
“On a pure math basis, it could make sense for Verizon to abandon the deal, pay the $500 million break-up fee, and then come back to Alltel for a more favorable purchase price, in effect requiring Alltel to absorb some of the additional cost of financing the deal.”
October 21, 2008 06:23 am
I'm not entirely sure where your information is coming from. Alltel has ALL of the Midwest Wireless markets customer service. Midwest Wireless had the Best customer service out there trumping Verizon. So to say it's "non-existant" proves you haven't done any research. Midwest Wireless wasn't bought for 1.2 billion dollars in this "southern MN" because it had poor customer service. Plus in the majority of S Mn Verizon is up for divestiture while Alltel will be staying. Is that because Alltel has poor "customer service"? Didn't think so. Comment on:Southern Minnesota October 11, 2008 06:04 am All of southern Minnesota is pulling for this deal to go through. Alltel's customer service is non-existant up here. Being a Verizon employee I hope this deal does not go through. A majority of our business comes directly from Alltel's "customer service". From a customers' point of view, however, they are screaming for something better.
October 15, 2008 02:03 pm
It is what it is,,, alltel employees have to remember the other people that lost jobs when alltel purchased other markets... If you make it, and become a Verizon employee, that should be a great benefit...
October 14, 2008 04:07 pm
As a employee of alltel communications on the retail side, its become a big concern that the merger will effect most of or jobs. if America is hurting then, I dont understand why the goverment would let this go thru to make more american jobless to me its looks like the goverment needs to step in and say no
October 13, 2008 04:06 pm
I'm an Alltel employee and I love this company and what it stands for. The merge is not a good thing to happen here in Little Rock, I have a great group that I work with we all have families and it will hurt us bad if this merge goes through. I started in cutomer service and received several compliments on how well Alltel treats their customers. If this Merge does go through it will destroy everything that Alltel has worked for to become the outstanding company that it is today.
October 13, 2008 06:01 am
Most investors are unaware that both companies hold a great deal of legal liability that will significantly affect profitability. Third party workers are being over exposed to RF Radiation in violation of FCC rules. As soon as the mass tort lawyers get wind of this, the lawsuits will start to fly. If the tobacco and asbestos industries are comparables, I hope Verizon and Alltel have lots of cash on hand!
October 12, 2008 06:24 am
I fully support the merger between Alltel and Verizon Wireless. In business, sometimes sacrifices must be made to ensure future success. There are detractors who speak of the cons of Alltel's acquisition including cutting a lot of jobs. The fact is that Alltel is so debt ridden right now that it won't be long before the company is forced to do that anyway. At least if it integrates with VZW, there will be the opportunity to either transfer right in or reapply for a job at the new Verizon Wireless call center. Railing against the inevitable is not only fruitless, it's pointless.
October 11, 2008 06:04 am
All of southern Minnesota is pulling for this deal to go through. Alltel's customer service is non-existant up here. Being a Verizon employee I hope this deal does not go through. A majority of our business comes directly from Alltel's "customer service". From a customers' point of view, however, they are screaming for something better.
October 11, 2008 06:04 am
I am not in favor of the deal, but my concern is that if the merger doesn't go thru, what will happen. With the amount of debt that goldman and sachs have accumulated, I am fearful that Alltel would lose more in the end by having to close their doors, then all employees would be without a job. I am a loyal employee of Alltel and proud to say I work there and never wanted the merger to happen. I would like to see Alltel go back to being a public company again. We never had the debt that is looming over us until TPG and Goldman Sachs purchased us.We have always been proud to be one of the few companies that didn't have to borrow money. Before TPG and Goldman Sachs we only had 2 million in debt. Look what that company has done to us. Now they have had to be bailed out by Warren Buffet. If Verizon bails on the merger, they will come back with a different offer and get Alltel for next to nothing. That is really sad. I don't want to be with Verizon, as an employee or as a customer.
October 11, 2008 06:04 am
As a Alltel Indirect Agent I hope the deal does not o through. Alltel should keep going IE: Buy US Cellular, promote as they are good at: a strong network but most important If their going to stay Alltel. They need some handsets that compete with Sprint, Verizon , At&T and even T-mobile. Thats what todays customer really want is cool handsets and strong Network.
October 10, 2008 06:41 pm
Not being an Alltel employee I can't speak to its culture but ultimately it is a business and one that is not doing as well as you might think...a business with a debt load of 4x its cash value is not very securely solvent...its limited in what it can do because of cash flow issues...eventually it will either have to revamp, get bought out or close its doors...