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

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.”