Verizon Wireless to buy Alltel

The third time must have been the charm for Verizon Wireless and regional cell phone operator Alltel.

Verizon Wireless supposedly has looked at buying Alltel twice in the past three years. And on Thursday it finally pulled the trigger, announcing that it plans to buy Alltel in a deal valued at $28.1 billion. As part of the deal Verizon will pay $5.9 billion and assume $22.2 billion in debt. The acquisition will make Verizon Wireless the largest cell phone company in the U.S., stripping AT&T of that title.

Verizon Wireless expects to close the deal by the end of the year, pending regulatory approvals.

Alltel was sold only last year for $27.5 billion to the buyout arm of Goldman Sachs and private equity firm TPG Capital. And, according to The Wall Street Journal, the banks that financed the deal, including Goldman Sachs, Citigroup, Barclays, and Royal Bank of Scotland Group, still owe about $24 billion in loans and bond financing. Alltel's sale to Verizon will eliminate this hefty debt burden, which has become more acute since the credit crunch started this year.

A takeover of Alltel by Verizon Wireless will create the largest cell phone operator in the country by adding Alltel's 13.2 million customers bringing the total to some 80 million subscribers. AT&T, which is currently the nation's largest cell phone provider, reported at the end of last quarter that it has 71.4 million customers. Verizon Wireless, jointly owned by Verizon Communications and U.K.-based Vodafone Group, would gain customers mainly in the Midwest and South where Alltel operates.

The merger will likely be carefully scrutinized by regulators in the Department of Justice and the Federal Communications Commission. And it's likely that Verizon will be asked to divest some of its assets in markets where the companies overlap.

Verizon Wireless was among the companies that considered buying Alltel last year when the company first started shopping itself around. And rumors had circulated back in 2005 that Verizon was interested in purchasing the regional cell phone operator. Both times the company didn't make its move.

In the first quarter of 2008, Alltel reported an 18 percent increase in earnings. Both Alltel and Verizon Wireless seem to be benefitting from troubles at Sprint Nextel, which has been bleeding customers since its 2005 acquisition of Nextel. As Sprint Nextel loses customers, Alltel and Verizon have been adding customers, which is has helped grow their bottom lines.

And the deal makes sense for Verizon Wireless. The two companies both use the CDMA (code division multiple access) cellular technology, so integrating the networks should not be a huge obstacle. The companies also share a similar technology road map. Earlier this year, Alltel said it would use a next-generation wireless technology called LTE to build its 4G network, the same technology Verizon has said it will use to build its 4G network.

What's more Verizon Wireless is in a good financial position to make such a purchase. Even though the company has just laid out $9 billion for new spectrum in the FCC's recent 700 MHz spectrum auction, it isn't carrying a heavy load of debt relative to its earnings. So the deal makes good sense for Verizon.

But the bigger question now is, who will be next? Acquisitions often occur in multiples. And given the current state of the economy, it's likely that more phone companies will merge in order to gain efficiencies and ultimately reduce costs.

Rumors have floated around that German-based Deutsche Telekom has been eying the struggling Sprint Nextel. I think this is a highly unlikely scenario since Deutsche Telekom's T-Mobile USA uses a different technology standard GSM. But perhaps there will be more consolidation among the smaller regional carriers. AT&T and T-Mobile USA could start gobbling up these smaller players, many of which use their GSM technology.