News : Verizon Wireless to buy Alltel in $28.1 billion deal

By Sinead Carew

NEW YORK (Reuters) - Verizon Wireless said on Thursday it will buy rural mobile 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 terms of the deal, Verizon Wireless would acquire the equity of Alltel for $5.9 billion, and assume an estimated $22.2 billion in debt that was incurred primarily when Alltel was taken private in a leveraged buyout last November by TPG Capital and Goldman Sachs Group Inc's GS Capital Partners.

Shares of Verizon Communications Inc, which owns 55 percent of Verizon Wireless, jumped nearly 6 percent after the announcement. Shares of Vodafone Group Plc, which owns the remaining 45 percent, rose 2.4 percent.

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

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

Verizon Wireless said the deal would generate 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, saying that was driven by reduced capital and operating expenses.

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

It said it would prepurchase about $5 billion in debt in relation to the deal.

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

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

"I'm sure the private equity investors that bought Alltel a while back would be glad to get Alltel off their balance sheet," said Yvonne Bishop, assistant portfolio manager at Summit Investment Partners, which owns Verizon shares.

"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. Investment banks in general have been trying to move debt commitments off their balance sheets," she said.

Verizon Wireless and Alltel, which has more than 13 million customers, together would have more than 80 million customers. AT&T, currently the biggest U.S. wireless service, said it ended the first quarter with about 71 million customers.

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

"We took a risk that, rather than overpaying, there would be a better day," said Verizon Communications Chief Executive Ivan Seidenberg about why the company is buying Alltel now rather than last year. He said he approached the private equity owners about the deal in April.

Verizon Wireless said Morgan Stanley acted as financial adviser for the deal and is providing bridge financing. Citibank, Goldman Sachs and RBS advised the sellers, it said.

Verizon Communication shares were up $1.90, or 5.1 percent, at $38.90 on the New York Stock Exchange, while Vodafone shares rose 5.3 pence, or 3.5 percent, to 160 pence in London.

(Additional reporting by Tiffany Wu; Editing by Brian Moss)