Private equity has made its biggest wireless deal yet with the $27.5 billion agreement for ownership of Alltel Corp., the fifth-largest U.S. carrier and major roaming partner for all four national operators.
The transaction, expected to close in the fourth quarter of 2007 or first quarter of 2008, will take the company private and place Alltel’s business and 12 million customers under the control of TPG Capital, the global buyout group of private-investment firm TPG (formerly Texas Pacific Group) and GS Capital Partners, the private-equity vehicle of the Goldman Sachs Group Inc. The companies agreed to pay $71.50 in cash per Alltel common share under terms of the transaction. The price stands as a 23% premium from the carrier’s share price as of December, when rumors first surfaced of a purchase of Alltel. The rumors subsequently drove the carrier’s share price up.
The transaction was the result of a strategic review of
options by the company, and Alltel’s board of directors unanimously approved the merger agreement, the company said. In addition to $24.8 billion in cash, the two private-equity firms will take on $2.7 billion of Alltel’s debt.
Private-equity companies, flush with cash, are moving beyond their historical strategy of flipping businesses by purchasing poor performers and turning them around. Alltel, with its solid performance, strong balance sheet and reputation for good management, didn’t seem like a natural fit for that model. However, private-equity firms are doing ever-bigger deals and broadening their scope due to large influxes of capital; no longer just business flippers, they are looking at long-term investments as well as steady cash cows in order to offer some protection from riskier bets.
For Alltel, the new ownership could fundamentally change its place in the wireless hierarchy.
Bob Egan, chief analyst for the Tower Group, had predicted that once private equity showed an interest in the automotive industry, wireless wouldn’t be far behind-and was proven right when the Alltel deal happened in short order after Cerberus Capital Management arranged an 80% stake in Chrysler Group.
Egan said that PE companies could decide to slim down the business and invest the cash it generates in other purchases. Or, they could approach ownership of Alltel with a strategy to “do something very different and turn the market on its head-or bleed it dry, break it up and sell it off in pieces.”
He suggested that Alltel, with its national roaming agreements, could become a sort of blockbuster wholesaler by selling network access, customer service and other enabling services to mobile virtual network operators. Although officials from the carrier were not available for comment on whether Alltel’s roaming agreements would be affected by the change in ownership, merger documents filed with the Securities and Exchange Commission state that all material contracts, including roaming, remain in effect and the company may not alter its existing roaming agreements prior to the close of the transaction.
The fact that the company will now be private means that it now will be under less pressure for quarter-to-quarter performance and can focus on long-term strategies and investments, according to Ranjan Mishra, director for Oliver Wyman. He added that despite the hefty price paid for Alltel, the investing companies must believe that either the company is worth it because of its cash flow or because they believe they can drive the company’s value still higher through investments such as new spectrum (likely acquired through the upcoming 700 MHz auction), new services and/or expanding the carrier’s territory.
Wholesale opportunities
The ability to take a longer view of the wireless industry’s risks and changes, Mishra said, may lead the company to “take a little bit more aggressive posture, which may require capital investment to justify the future growth story. I think going forward, it’s a different ball game” for the traditionally conservative Alltel.
Several analysts concluded that the buyout of Alltel confirms room for future growth in the wireless industry, even as the U.S. market approaches saturation. The buyout of Alltel also renewed speculation that struggling Sprint Nextel Corp. might end up as a target for private-equity firms.
“While not inconceivable, we question whether private equity capacity could fund the deal, given Sprint’s $60 billion market cap, vs. Alltel’s $26 billion,” noted Cowen & Co. analyst Tom Watts in a research note.
Even if Sprint doesn’t end up being bought, wireless companies will have to be on their toes now or risk becoming unwilling targets of private-equity buyouts, Mishra said.
“You have to be careful now,” he said. “You cannot sit on cash or opportunity for long. If you do that, what you do is make yourself a target for PE. That’s not necessarily a bad thing, but you need to decide . will I make myself appealing to them, or do I want to keep my independence?”
He also noted that the influence of private equity could be a positive for the industry, which Mishra said has substantial room for efficiency improvement in areas such as wireless retail and advertisement and media spending.
The Alltel transaction, Egan said, is a declaration from the private-equity industry that could presage a shake-up in wireless.
“Given what PE has now done in other areas, it’s a clear and present danger,” Egan said. “They have said, ‘We’re not afraid of any market sector.’ . Because of the nature of their business, they also tend to look at markets in different ways,” Egan added. “They might do something very different in the way we look at the wireless industry.”
