Speculation on which company may acquire Alltel has run rampant ever since the wireless operator disclosed during an earnings call last month that it was reviewing “a broad spectrum of options” regarding a possible sale.
AT&T became the latest company to be added to the list of possible suitors, joining Verizon Wireless, Sprint Nextel and private equity firms. But with a market cap of $22 billion, Alltel would come at a hefty price.
Alltel is looking for a buyer because the larger rivals are getting bigger and broadening coverage. The longer Alltel remains independent, the more likely its stock would diminish, providing less of a return for shareholders.
“With slowing growth, it’s harder and harder for them to compete with a national player,” says John Byrne, wireless analyst with Technology Business Research in Hampton, N.H.
Alltel’s eagerness may also hinge on a U.S. government auction for radio spectrum expected this summer. Companies that have registered to participate in the auction are restricted from contacting each other in the months preceding the auction.
Conversely, Alltel could be an attractive buy for many of its rivals for a few reasons. With 11 million customers, Alltel is the fifth largest wireless service provider in the U.S. behind Cingular (61 million), Verizon Wireless (59.1 million), Sprint Nextel (53.1 million), and T-Mobile (25 million).
Alltel also has the largest geographic presence of any U.S. wireless operator, and serves customers in rural areas or smaller markets where bigger rivals have limited coverage. The wireless service provider primarily operates a CDMA-based network, but it also had GSM-based assets stemming from its January 2005 $6 billion acquisition of Western Wireless.
Another reason Alltel might be an attractive buy is because its average revenue per user is steady at $52.68, as of year-end 2006. Sprint Nextel, despite struggles since its merger is the only service provider with a stronger ARPU, $61.00 for 2006.
T-Mobile is third with 2006 year-end ARPU of $52.00; Verizon Wireless and Cingular make up the end of the pack with ARPU during the same period of $49.80 and $49.10 respectively.
Observers believe Verizon Wireless would be most likely to acquire Alltel due to technology compatibility – both operate CDMA networks – and complementary coverage. But Verizon may also be holding out in order to wrest full control of Verizon Wireless from partner Vodafone, which could cost upwards of $50 billion.
Verizon Wireless declined to comment on the speculation.
Sprint Nextel also operates a CDMA network but is a less likely candidate to acquire Alltel due to integration issues with its $35 billion Nextel purchase, observers note.
“We never comment on rumors and speculation,” a Sprint Nextel spokesman says.
And AT&T may be even less likely because its Cingular wireless network is GSM-based, which would present compatibility and integration challenges with the Alltel network. Plus, AT&T, the largest wireless operator in terms of subscribers, would face antitrust hurdles, especially if a deal comes close on the heels of the carrier’s $86 billion purchase of BellSouth.
But never say “never.”
“AT&T could make a run at them because Alltel has considerable rural holdings that are GSM,” says TBR’s Byrne.
An AT&T spokesman says the company does not comment on “rumors or speculation about mergers and acquisitions.”
Alltel has roaming agreements with all three carriers.
Indications that Alltel was prepping its business for sale were evident when it ditched its wireline assets, and then did not spend any money on the most recent FCC wireless spectrum auction.
By comparison, Cingular, Sprint, T-Mobile, and Verizon Wireless collectively bid $13.9 billion on new spectrum licenses. T-Mobile spent the most, $4.2 billion, on spectrum it needed to support its 3G rollout.
Although Alltel is still in the process of rolling out its EV-DO services, it was not interested in bolstering its spectrum holdings. This may have been because the company is comfortable with its spectrum allocation throughout the markets it serves, or because it was planning to court a buyer in the near term.
But the snag might be Alltel’s price. With its $22 billion market cap, confirmation that it’s in play and speculation on potential suitors, Alltel’s stock will be pumped up, perhaps scaring off any possible near-term suitors.
“The response has not been that great because of the valuation,” says Byrne. “I wouldn’t be surprised to see nothing happen on this right now.”
Alltel did not return a phone call seeking comment.
