Verizon-Alltel Deal Just One of Many As Wireless Consolidates
Published on: 5th June 2008
NEW YORK -(Dow Jones)- Verizon Communications's $28.1 billion agreement to acquire Alltel Corp. is the latest megamerger in a wireless industry that's quickly consolidating to compensate for slowing subscriber growth.
In the U.S., wireless is rapidly approaching saturation, with about four in five consumers owning a cellphone, according to the Federal Communications Commission. As a result, obtaining subscribers - either organically or through acquisitions - has become more important.
The deal announced Thursday would add Alltel's 13.2 million subscribers to Verizon Wireless, giving it more than 80 million customers and making it the largest cellphone operator, surpassing AT&T.
"Given penetration levels of 85%, we believe network scale and handset purchasing power becomes increasingly important to drive profitability," Goldman Sachs analyst Jason Armstrong said.
Big wireless mergers can be tricky because of the melding of different technologies, but this latest deal may prompt a reaction from the struggling Sprint Nextel and from T-Mobile USA, the US wireless carrier of Deutsche Telekom.
Last month, Deutsche Telekom was reported to be mulling a bid for Sprint, No. 3 in the U.S., to help boost T-Mobile, a distant No. 4. Thursday, Sprint shares rose 1.1% to $9.35, while Deutsche Telekom ended 0.7% lower at EUR10.63 in Europe.
Beyond them, smaller companies - such as MetroPCS Communications, Leap Wireless International and Telephone & Data Systems (TDS) - also could get caught up in the merger wave.
"Generally speaking, you will continue to see consoldiation among the smaller players," said William Power, an analyst at Robert W. Baird & Co. "(The wireless industry) is a more limited field than it once was."
MetroPCS shares added 1.5% to $21.10, Leap Wireless gained 45 cents to $59.11 and Telephone & Data slipped 12 cents to $49.97.
Already, there's been interest in the smaller players. AT&T late last year completed its purchase of Dobson Communications, while Verizon Wireless is in the middle of wrapping up its acquisition of Rural Cellular.
Overall, telecom deals have been the busiest area for mergers worldwide, boasting the highest M&A value out of all the industries, according to Dealogic. The value of global telecom deals year to date is $229.58 billion, or a 61% increase over a year ago, the firm said. In comparison, the total value of all deals is worth $1.59 trillion, down 31% from a year ago.
Telecom deals have been especially prevalent in Europe. For example, earlier today, France Telecom made an unsolicited bid of $42 billion for TelioSonera, which TelioSonera rejected.
The Verizon-Alltel deal could spur more deals in another way - as the two companies shed assets in order to get regulatory approval. Analysts expect the deal to go through but not without some concessions. Credit Suisse analyst Christopher Larsen estimates 25% to 30% of the markets overlap, and that the divestitures would be small.
But any small assets that are sold off represents a buying opportunity for rivals such as AT&T and T-Mobile USA, according to UBS analyst John Hodulik.
Dangerous Mix Of Technology
The run of recent big wireless deals began with the ill-fated merger of Sprint and Nextel, and continued with the more successful bundling of AT&T's former Cingular Wireless arm and the old AT&T Wireless.
Part of the problem with the mismanaged merger that created Sprint Nextel was the melding of two different wireless technologies, an issue that complicates many telecom deals.
However, in Verizon's case, the New York company was always considered a leading candidate for Alltel because they use the same wireless technology. AT&T and T-Mobile USA use a different one, and while Sprint was also a possibility from a technology standpoint, it wasn't in a strong enough financial position right now.
"If Sprint's financial situation improves in future years, the company would bid for Alltel itself - if not to buy, to at least ensure that Verizon pays a higher price," Larsen said.
The timing and the projected $9 billion in merger cost savings - which includes not having to pay roaming fees to Alltel - were likely enough to win over Vodafone Group Plc (VOD), which owns a 45% stake in Verizon Wireless. Verizon controls the remaining stake.
Wall Street also seems to like the deal as Verizon shares rose 6.8% to $39.49.
Small Players, Big Deals
The next round of merger deals, though, is likely to focus on smaller carriers.
MetroPCS and Leap Wireless are two companies expected to merge. Both companies offer pre-paid unlimited wireless service, and are seen fitting well together because they have few overlapping markets.
Last year, MetroPCS made an unsolicited buyout offer for Leap but was rebuffed. Still, industry observers believe the two will ultimately come together. Down the line, a combined company could be a target for a larger carrier.
Leap Chief Executive Doug Hutcheson told analysts in a conference call last month that the company was looking at outside opportunities but didn't make any specific comments. Spokesman Gregory Lund declined to comment further.
A spokesman for MetroPCS wasn't immediately available for comment.
Telephone & Data Systems (TDS) and majority-owned subsidiary U.S. Cellular are companies that are seen as potential targets for the larger players. It's unclear, however, how willing they are to sell. Telephone & Data came under fire from shareholders who claimed the company failed to adequately consider a lucrative buyout offer from an unidentified acquirer.
U.S. Cellular shares rose 36 cents to $64.01.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020; firstname.lastname@example.org
(END) Dow Jones Newswires
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