Stock of the Day
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Alltel Corp. (AT)
Alltel Dialing up a Sale
The nation's fifth-largest wireless provider, Alltel Corp. has gently indicated over the past few months that it is open to the idea of selling itself. In fact, according to most reports, the company is more than just 'open' to the idea - it has been actively pursuing suitors ever since officials from the company announced in February during a conference call that they will be conducting a strategic review (bankers love hearing that phrase) of their business. Interest in the company has been lukewarm as evidenced by the fact that no deal has been announced even though rumors of a sale have been swirling for a while. But now it looks like that action in the company may be picking up as the Wall Street Journal reported this morning that private equity consortiums for a deal are taking shape and bids could come in soon. So is Alltel finally going to be sold and if so, for how much?
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Alltel is the biggest regional player in the wireless market with about 12 million subscribers and footprints in all or some of 35 states, with a heavy concentration in rural areas in the Midwest and South. As the Journal points out in an article today, the balance sheet of the company makes it look like a prime candidate for a buyout because of low long term debt levels (about $2.66 billion) and the fact that company generates close to that amount in free cash flow each year ($2.1 billion in 2006). Private equity firms typically finance a large part of the buyout by taking on debt and putting it on the company's balance sheet in the hopes of selling the company for a lot more down the road and therefore, they are always looking for targets that can withstand a substantial amount of additional of debt on their books. Alltel has also done well financially over the last couple of quarters (even though net income fell short of analyst expectations in Q1 of 2007, the revenue figure and the number of new subscribers exceeded forecasts). It spun off its traditional wireline business in 2006 and is now therefore, a purely wireless play. But obviously, CEO Scott Ford and the rest of the management team don't believe that they can make the jump to a national player and compete with the big boys such as Verizon Wireless, AT&T (T: Charts, News, Offers), Sprint-Nextel (S: Charts, News, Offers)etc. all by themselves.
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So given all this, plus the fact that Alltel has been putting out feelers to potential buyers for a while now, why has somebody not stepped up to the plate yet? Part of the reason is the fact that the last few months of buyout speculation have pushed the stock price of Alltel up making a potential purchase more expensive. The stock is up over 9% since December when reports first surfaced describing Alltel as a buyout target. Another reason that buyers may be hesitant to pull the trigger is doubts over how much of an impact they can have on Alltel. The company is in a fairly solid financial position already so it's not like it needs severe rehabillation leaving little room for somebody to add value. Plus, Alltel competes in a fiercely competitively wireless industry which is showing signs of stagnation (e.g. Sprint-Nextel's recent lukewarm results). Finally, the Journal is also reporting that Alltel wants a potential buyer to take on a level of debt which is, at the most, seven times greater than the company's annual cash flow. This means that the maximum amount that a buyer can borrow is around $20 billion. Given the fact that Alltel's market cap as of right now is $23.12 billion and that a premium will have to be paid to Alltel shareholders, a potential buying party could be looking at investing about $8-10 billion of their own money.
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But nonetheless, interest in Alltel is now building up. Reportedly, 3 different private equity consortiums have taken shape and they include Blackstone Group and Providence Equity Partners, Texas Pacific and Goldman Sachs' private equity arm, and finally, KKR and Carlyle Group. They are in talks with Alltel management and a lot of market analysts expect bids to come in at around $70 per share. Of course, another interesting possibility would be a strategic buyer stepping in, most likely Verizon (VZ: Charts, News, Offers) or AT&T, who would consider Alltel's assets to be a good addition to their Verizon Wireless and Cingular units respectively.
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Profile |
The Company's principal activity is to provide wireline and wireless communication. The Company operates in three segments: Wireless Communications, Wireline Communications and Communications Support Services. The Wireless Communications segment consists of cellular, PCS and paging operations. The Wireline Communications segment consists of incumbent local exchange carrier, competitive local exchange carrier and Internet access operations. The Communications Support Services segment includes long-distance and network management services, communications products, directory publishing operations and telecommunications information service operations. The Company discontinued the financial services division of its information services subsidiary, ALLTEL Information Services Inc.
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