Verizon Wireless to buy Alltel in $28.1 billion deal

By Sinead Carew

NEW YORK (Reuters) - Verizon Wireless said on Thursday it would buy rural mobile phone service provider Alltel Corp for $28.1 billion, including debt, which would vault it to first place in the U.S. market ahead of AT&T Inc.

Under the deal, Verizon Wireless would acquire the equity of Alltel for $5.9 billion and take on an estimated $22.2 billion in debt, mostly incurred when Alltel was taken private in November in a leveraged buyout by TPG Capital and Goldman Sachs Group Inc's GS Capital Partners.

The shares of Verizon Communications Inc, which owns 55 percent of Verizon Wireless, rose 6 percent after it said the deal would boost earnings by more than 10 cents a share in the first year after the deal, excluding items such as integration costs. The shares of Britain's Vodafone Group Plc, which owns 45 percent of Verizon Wireless, rose 3.8 percent.

"This is a way of getting growth from a market that's becoming fully saturated and beginning to slow down," said analyst Joseph Bonner at Argus Research.

"They get the bragging rights," he said, referring to Verizon overtaking AT&T as the largest U.S. player.

Verizon Wireless said the deal would create savings of $1 billion in the second year after closing, which is targeted for the end of 2008, pending regulatory approval. It forecast total savings of more than $9 billion by 2011, driven by reduced capital and operating expenses.

Verizon said the deal would be cash-flow positive in the first year, although it estimated integration costs at $1.1 billion to $1.2 billion in the first year and $500 million to $600 million in the second.

DEBT LOAD

Verizon said it would take on about $5 billion in bridge loans in the next few days as part of the agreement at a $200 million discount to face value. It plans to assume about $2.3 billion of Alltel debt that predated the LBO and plans to set up new finance agreements to immediately pay back the remaining roughly $15 billion of debt when its Alltel purchase closes.

Verizon Wireless does not plan to pay Vodafone a dividend for the next three years, as it will use its cash to pay debt from the deal, but plans to review the dividend policy yearly.

Verizon's move comes about seven months after Alltel's $27.5 billion leveraged buyout, which was the largest-ever private equity investment in the U.S. wireless industry.

Analysts have speculated TPG and Goldman may have wanted to sell Alltel because of tight capital markets.

"All of the investment banks have constrained balance sheets right now and they need to free up their capital. Alltel was bought at a pretty heady time in the credit market," said Yvonne Bishop, assistant portfolio manager at Summit Investment Partners, which owns Verizon shares.

Verizon Wireless and Alltel, which has more than 13 million customers, together would have more than 80 million customers. AT&T ended the first quarter with about 71 million customers.

Alltel serves 57 primarily rural markets where Verizon Wireless does not operate, Verizon Wireless said. They both use a common network technology.