What Alltel's $27.5 Billion Buyout Means

It's no surprise that Alltel was looking for a buyer to compete with bigger companies with broader coverage, but more people than not expected the purchaser to be another carrier.

Alltel quashed all of those rumors on Sunday when it announced that TPG Capital and the private equity division of Goldman Sachs Group is buying the company for US$27.5 billion and taking it private.

Here's what the deal means for Alltel, its customers and the wireless industry at large:

That's a large sum for a company that's not offering national service. Why so much?

Alltel is the fifth largest wireless service provider behind AT&T, Verizon, Sprint Nextel and T-Mobile. It has 12 million customers in 35 states, although many rural markets, and sizeable revenue growth. The company's 2006 revenues were $7.9 billion, an increase of 20 percent from 2005 revenues of $7.2 billion.

The company has also been operating lean. It was the only one of the top five wireless carriers that did not participate in the last FCC wireless spectrum auction. The FCC auctioned off its Advanced Wireless Service spectrum last year, fetching $14 billion from carriers across the country looking to beef up their spectrum holdings to support 3G and beyond wireless offerings. Alltel needed more spectrum if it was going to support 3G and beyond services on its own, but that clearly was not the company's plan.

If Alltel has been planning to be sold for quite some time, why private equity firms rather than one of the other carriers that were rumored suitors?

"I don't think Verizon was interested at this time -- the rural markets aren't strategic for them and Sprint has its own issues struggling still with the Nextel acquisition and planning its future," says Phil Redman, an analyst at Gartner. "It was obvious that Alltel was looking for an out and this seems to be the current fashion."

Will another wireless carrier be more interested in Alltel now that it's going private?

"This is an interim step," says Jeff Kagan, a telecom industry analyst. "This is the first buy of a two-part deal."

Kagan says the private equity investors might hold on to the wireless company until "Verizon, AT&T, Sprint or some other carrier," are interested in buying Alltel.

Another analyst agrees. "If Alltel continues to grow and be profitable, it still remains a possibility someday," Redman says. Right now it's not strategic for Verizon, which Redman sees as the most likely buyer of Alltel in the future. "But it might be a good business move in the future," he says.

Should Alltel wireless customers be concerned that a financial company is taking over the carrier?

"There's always a concern when the owner's primary focus is profit vs.growing the business so it is possible that popular features could be cut in order to increase profitability," Redman says.

"This is a very big question," Kagan says. "It depends on who will run the company."

According to Alltel, current CEO Scott Ford and most of upper management is staying on board. If the same team is running the company then customers will likely see little change, but if that changes, "all bets are off," Kagan says.

Will there be further consolidation in the wireless service provider market in the near term?

Analysts agree this is possible and may not be limited to wireless carriers. "This move puts a price tag out there, so companies like Qwest and Sprint would want to see the same return, anywhere from eight times to 10 times revenue," Redman says.

T-Mobile has been the most aggressive in the United States with its 100 percent stake in T-Mobile USA, he says. Other foreign investors might take their lead and pick up a U.S.-based wireless carrier, he says.

There has been some talk this could be the fate of Sprint Nextel. Is that possible?

"It's a possibility but it would be an enormous deal," Redman says. "I think Sprint will go the course for at least the next quarter, but if it doesn't see improvements by then it is more likely." Analysts also speculate that upper management changes at Sprint would also come if the company doesn't turn around soon.

This story, "What Alltel's $27.5 Billion Buyout Means" was originally published by Network World.

To comment on this article and other PCWorld content, visit our Facebook page or our Twitter feed.
Related:
Shop Tech Products at Amazon