US CREDIT-Alltel weaker on private equity reports
NEW YORK, May 9 (Reuters) - Alltel Corp.'s AT.N credit spreads will weaken further if the company succumbs to a deal to take it private, however there are several impediments to any deal, including Alltel's relatively high share price.
Private equity firms Providence Equity Partners and The Blackstone Group are teamed up in a bid for the U.S. rural wireless telecoms service provider Alltel, a source familiar with the matter said on Wednesday. For details see [ID:nN09231900].
TPG Capital [TPG.UL] and the private-equity arm of Goldman Sachs Group Inc. (GS.N) are linked up for a bid as well, the Wall Street Journal reported on Wednesday. The Carlyle Group and Kohlberg Kravis Roberts & Co. [KKR.UL] are another group, the paper reported, citing unnamed sources.
"As the likelihood or the possibility of a private equity takeout gains steam there is further downside for spreads," said Leah Pilla, director in high grade TMT research at UBS Securities in Stamford, Connecticut.
The cost to insure the debt of Alltel with credit default swaps rose by around 30 basis points on Wednesday to around 146 basis points, or $146,000 per year for five years to insure $10 million in debt.
Spreads had also widened 15 basis points on Tuesday after an Alltel official cancelled an appearance at an investment conference, sparking speculation a deal may be in the works.
Alltel said on an earnings conference call with analysts in February that its board had met to review options that could involve anything from "balance sheet restructuring to strategic alternatives to operational opportunities." [ID:nN20475130].
"I think strategic investors at this point are becoming less interested just due to the high price of the company," Pilla said. The chance of an LBO occurring may be around 50 percent "but it's tough to say whether or not those private equity investors will balk at the price as well."
Alltel's stock rose to more than $66 per share on Wednesday, compared with around $60 at the end of the year.
Credit default swaps of Alltel have been volatile since January when they doubled to the 100 basis point area as speculation the company would be targeted in a LBO gained momentum. [ID:nN03569692].
However, "it's not clear how private equity would generate the type of returns they need at Alltel's current stock price and given the types of capital expenditures needed to maintain Alltel's competitiveness in the wireless sector," said Rohit Sethi, director in research at Aladdin Capital in Stamford, Connecticut.
"If they were sold, the best value would be created by selling to another CDMA-based company such as Verizon or Sprint, and right now Verizon is in the best position to consider such an acquisition," Sethi said.
CDMA is a type of network technology. Analysts have named Verizon as a likely potential bidder for Alltel because it would more easily be able to integrate the network than would a company using different technology.
If a sale is not likely Alltel may instead use debt to fund share buybacks or dividend payments to shareholders.
"There is also the possibility that they just do some kind of leveraged recap, which would also be negative (for bondholders), but may not be as negative as an LBO," said UBS' Pilla.
If the company does get acquired in an LBO, Alltel's default swap spreads could widen by at least another 100 basis points, she said.
