Verizon Wireless today officially announced an agreement to purchase Alltel Corp. for $28.1 billion, which would make the new company the largest wireless carrier in the U.S. with 80 million subscribers.
The deal will undoubtedly provoke scrutiny by the Federal Communications Commission and the Department of Justice, the parties said, although they hope to complete the merger by the end of the year, according to a statement.
The agreement requires Verizon to acquire $5.9 billion in equity from Alltel, and its net debt of $22.2 billion, for a total of $28.1 billion.
Verizon's agreement is with Alltel as well as private investment firm TPG Capital and GS Capital Partners, although the role of the latter two companies was not detailed. Verizon Wireless is a joint venture of Verizon Communications and Vodafone.
"This move will create an enhanced platform of network coverage, spectrum and customer care to better serve the growing needs of both Alltel and Verizon Wireless customers for reliable basic and advanced broadband wireless services," said Lowell McAdam, Verizon Wireless president and CEO.
Alltel has 13 million customers in 34 states, while Verizon Wireless has 67.2 million nationwide. The companies noted that Alltel is serving 57 mostly rural markets that Verizon Wireless does not serve. Alltel would get access to 4G technology known as Long Term Evolution for fast wireless connections, the companies said.
Capital and operating expenses would be reduced for Verizon Wireless by more than $9 billion due to the integration, the companies said.
Analysts said the deal shows how mergers will become more important as cellular service becomes more competitive.
It helps Verizon Wireless grow by acquiring a new customer base, said independent analyst Jeffrey Kagan. "We have seen Verizon do similar deals in the past including the acquisition of MCI, and one thing we have learned is they don't like to overpay. Not that it matters much anymore because they are all so big, but this deal would give Verizon Wireless the No. 1 spot in the rankings," he said.
Some analysts said that if the merger concludes, moving AT&T Inc. to the second place position, that Sprint Nextel Corp., now third, would be hurt.
"This [deal] is another nail in the coffin for Sprint," said Michael Voellinger, an analyst at Telwares in Parsippany, N.J. "Alltel is a highly valuable and strategic roaming partner to the top four providers, and this acquisition would put long-term pressure on pricing and terms of those arrangements."
But Kagan disagreed and said Sprint has taken steps to become stronger in recent months and should stay in the third position.
Analysts said the deal could face regulatory hurdles, but the parties to the deal are probably betting its chances are improved by wrapping it up before a new adminstration arrives in Washington in January.
"I think it [the deal] should go through, with some concessions on spectrum possible, but one of the reasons why they were interested in doing the merger this year was the possibility of a new administration coming in," said Tole Hart, an analyst at Gartner Inc.
A new administration would appoint new members of the DOJ and the FCC, with different attitudes about mergers and spectrum regulations.
Ken Hyers, an analyst at TBR in Hampton, N.H., said Verizon Wireless will need to sell wireless licenses in markets where the Justice Department determines it has too much spectrum. Still, he predicted that the overall regulatory process will be "relatively smooth" because the two company's networks are complementary and don't overlap.