With Alltel Corp.’s announcement last week that it would spin off its wireline business and merge it with Valor Communications Group, the nation’s fifth-largest carrier is on its way to becoming purely a wireless player in an increasingly consolidated mobile marketplace.
The declaration had two almost immediate results: speculation about whether the spinoff made Alltel a juicier potential acquisition, and an alert from several investment services that Alltel’s credit rating may be downgraded because of concerns about its debt levels and ability to compete with the four national wireless carriers.
What does the future hold for Alltel?
As a potential acquisition target, most analysts note the most likely possible suitor would be Verizon Wireless, which operates with similar network technology-a CDMA-based network and Qualcomm Inc.’s BREW platform-and has an extensive roaming agreement with Alltel that runs through 2010.
“We believe that the most logical candidate for Alltel’s wireless business is ultimately Verizon Wireless given the same CDMA technology and their preferred roaming relationship, just to name a couple of reasons,” UBS Business Research stated in an October report.
However, UBS noted that because Verizon Wireless and Alltel have a significant amount of 850 MHz spectrum overlap in a number of markets, there is a “significant potential divestiture requirement if the two companies were to merge. For these reasons, we don’t see why Verizon Wireless would be in such a hurry to acquire Alltel.”
Analysts note that Sprint Nextel Corp., which operates both a CDMA and iDEN network, has its hands full with its current network integration, and that technology issues diminish a possible deal with GSM-based operators Cingular Wireless L.L.C. and T-Mobile USA Inc.
And with the auction of 90 megahertz of 3G spectrum slated for June, companies looking for some spectrum elbow room don’t necessarily need to look at Alltel to acquire it.
In fact, Marina Amoroso of the Yankee Group thinks that despite the threats to Alltel’s credit rating, the carrier’s overall financial picture puts the company in a position to be a strong bidder in the 3G spectrum auction. The recent acquisitions of Western Wireless Corp., Midwest Wireless, network assets and subscribers from Cingular, and its acquisition of CenturyTel Inc.’s wireless assets in 2002 have increased the company’s territory substantially.
“With an increase in their footprint and their potential to buy new spectrum, I think that it’s going to be very hard to keep them as a Tier Two carrier for much longer,” Amoroso said. “I think they are trying to position themselves as a national carrier.”
Some have noted that Alltel could be a potential target by foreign investors looking to get into the still-growing U.S. wireless market, but add that Alltel’s lack of coverage in big markets likely would diminish its appeal.
With the chances of Alltel being acquired hampered by a lack of suitable bidders, many feel the operator is more likely to continue to roll up rural competitors.
A UBS report released just after Alltel announced its wireline spinoff noted: “We don’t anticipate that (Alltel) will be acquired in the near term” and in fact, “given the low leverage of the wireless company, we could see the company continuing to acquire smaller rural wireless operators.”
While Alltel refused to divulge any future acquisition plans, analysts note U.S. Cellular Corp. could be Alltel’s next target. U.S. Cellular currently serves more than 5 million customers, uses similar network technology and has operations in a number of attractive top 50 markets.
Gartner Research senior analyst Tole Hart observed that Alltel’s current footprint, while especially strong in rural markets, has a large Midwestern hole that would be “a pretty good match with U.S. Cellular.”
A deal for U.S. Cellular would require an agreement between the Ford family, which runs Alltel, and the Carlson family, which controls a majority of U.S. Cellular through Telephone and Data Systems Inc. operations, which some feel is not likely in the foreseeable future.
Alltel also could try to pick up any number of smaller CDMA-based operators that offer unlimited local calling services-like Leap Wireless International Inc. or MetroPCS Inc.-if it was interested in moving into more urban markets. As evident by the Western Wireless deal, Alltel is also not afraid of taking on a mixed technology service provider, which could open up a potential deal for Rural Cellular Corp., which operates both CDMA- and GSM-based networks.
Of course, Alltel could always turn its focus inward after the most recent rash of deals and work on strengthening its regional competitiveness and not bother itself with further expansion. But, if recent history is any indication, that option seems unlikely.
