Verizon Wireless to Purchase Alltel for $28.1 Billion

Verizon Wireless agreed to buy Alltel Corp. for $28.1 billion in cash and debt to overtake AT&T Inc. as the biggest mobile-phone company in the U.S.

The deal is worth 2.1 percent more than the $27.5 billion TPG Inc. and Goldman Sachs Group Inc. paid last year to take Alltel private. The acquisition includes about $5.9 billion in cash and $22.2 billion in debt. Parent Verizon Communications Inc. rose the most in more than five years in New York trading.

Verizon Wireless Chief Executive Officer Lowell McAdam gets 13 million clients and plans to reap $9 billion in total savings from the purchase, which may help him offer discounts. The sellers make a 28 percent profit on their investment, while their lenders are repaid almost in full as Verizon uses its A credit rating to refinance the Alltel debt on their books.

``The banks may benefit, but ultimately, the real impetus for TPG selling is they achieved a substantial return in a short period,'' Chris Taggert, an analyst at fixed-income research firm CreditSights Inc. in New York, said in an interview.

The purchase will allow Verizon Wireless, jointly owned by Verizon Communications and Vodafone Group Plc, to start offering service in 57 rural markets, according to a statement today. Basking Ridge, New Jersey-based Verizon Wireless said the transaction may help save as much as $1 billion in the second year after it closes by reducing advertising and roaming costs.

Verizon Communications rose $1.98, or 5.4 percent, to $38.96 at 4:02 p.m. on the New York Stock Exchange. The gain was the largest since April 2003. Vodafone shares climbed the most in almost four months in London trading, advancing 5.8 pence, or 3.8 percent, to 160.45 pence.

Subprime Pressure

Banks are under pressure to get LBO loans off their books after taking more than $386 billion in asset writedowns and credit losses triggered by the collapse of subprime mortgages. They are sitting on more than $77 billion of loans from the buyout boom of 2006 and 2007, according to New York-based CreditSights, down from a peak of $230 billion last year. Some has been sold at a discount to private-equity firms such as Fort Worth, Texas-based TPG.

Verizon will purchase from the banks about $5 billion of bridge loans used to finance the LBO at a 4 percent discount to face value, according to a banker with knowledge of the terms. The company plans to repay $13.8 billion of Alltel's term loans at full value. Banks hold the majority of Alltel's debt, which they couldn't resell to investors amid the credit crunch, although they sold $3.2 billion of loans in November.

Morgan Stanley is financing the repurchase of the bridge loans.

LBO History

TPG and Goldman committed $4.6 billion of equity when they bought Little Rock, Arkansas-based Alltel. They borrowed $24 billion from lenders including Citigroup, Barclays Plc, Royal Bank of Scotland Group Plc and Goldman's investment bank.

Verizon said it plans to refinance high-cost LBO debt. The wireless business will have $38 billion in debt after the close, and will cut that by more than half to $15 billion in two years.

Standard & Poor's cut its outlook on Verizon to negative from stable today because of the increase in debt. The ratings service maintained its A corporate credit rating and said it viewed the transaction as favorable.

Credit-default swaps tied to Verizon's bonds fell about 10 basis points to 65 basis points as of 4 p.m. in New York, according to CMA Datavision. The contracts, which decline as investor perceptions of credit risk improve and rise when they deteriorate, had risen yesterday by the most in almost two years.

Alltel Debt

Contracts tied to Alltel bonds dropped 115 basis points to 100 basis points and have plunged from 630 basis points the past two days, according to CMA.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Alltel's 7 percent notes due in 2016 gained 9.8 cents on the dollar today to 103.5 cents on the dollar. Verizon Communications' 5.5 percent note maturing in February 2018 rose 1.2 cents on the dollar to 97.77 cents on the dollar.

The Alltel LBO was the biggest in telecommunications history. U.S. telephone companies, including Verizon and Alltel, are adding record numbers of wireless users. Verizon added 1.5 million mobile customers last quarter, beating the 1.3 million new users at AT&T, the largest U.S. phone company overall. Alltel added a record 385,000 net customers.

Wireless Exposure

``All of the U.S. operators are racing to increase their exposure to wireless, because it has the best growth prospects of anything in their portfolio,'' said Craig Moffett, an analyst with Sanford C. Bernstein & Co. in New York.

AT&T, which gained control of the Cingular mobile-phone network with its 2006 purchase of BellSouth Corp., has about 71.4 million wireless users. With the addition of Alltel, Verizon Wireless would have about 80.2 million.

The companies plan to complete the deal by the end of the year if the transaction can get regulatory approval. Morgan Stanley advised Verizon Wireless, while Citigroup, Goldman Sachs and Royal Bank of Scotland provided financial counsel to the sellers. Vodafone was advised by UBS AG and Lehman Brothers Holdings Inc.

An Alltel-Verizon combination might be reviewed by the Justice Department because of antitrust concerns, Edward Jones & Co.'s Rick Franklin said before the announcement. While Verizon may have to sell off some assets, gaining regulatory approval shouldn't be a problem, said the St. Louis-based analyst, who advises buying Verizon Communications shares.

Alltel Buyout

Before the buyout, CEO Scott Ford spun off Alltel's land- line unit and bolstered the wireless business with the $4.5 billion purchase of Western Wireless Corp. in 2005 and Midwest Wireless Holdings LLC for $1.08 billion in 2006. Ford will stay on as chief of Alltel until the transaction is completed.

TPG was founded in 1992 by David Bonderman, James Coulter and Bill Price. The firm teamed up with Kohlberg Kravis Roberts & Co. last year in the $32 billion acquisition of Texas power producer TXU Corp., the biggest-ever LBO.

TPG has been one of the most active private-equity firms this year. Coulter told an audience in Boca Raton, Florida, on June 4 that his firm had done more deals in the first five months of 2008 than in the same time in 2007.

The firm led a $7 billion minority investment in Washington Mutual Inc., the largest U.S. savings and loan. It also bought a 23 percent stake in Bradford & Bingley Plc, the U.K.'s largest lender to landlords, for 179 million pounds ($353 million).

Vodafone said separately today that Verizon Wireless will start an annual review of whether to offer Vodafone shareholders a dividend. The company said last year that once Verizon Wireless paid down its $12 billion in debt in 2009, the U.S. company would consider a payout.