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Alltel sees gold mine in rural service

Many telecommunications firms look at markets such as Iowa and North Carolina and see corn or cotton. Arkansas-based Alltel, however, sees cash.

    Many telecommunications companies look at markets such as Cedar Falls, Iowa, and Hickory, North Carolina, and see corn or cotton.

    Alltel, however, sees cash.

    The independent incumbent local telephone company that focuses on rural areas and smaller metropolitan markets expanded its reach last week with its $1.5 billion acquisition of Aliant Communications. The agreement, subject to regulatory and shareholder approval, is expected to close by mid-1999.

    The deal adds to the Little Rock, Arkansas-based company's customer base in the Midwest and Southeast.

    "It makes perfect sense. Nebraska is just an extension of their territory," said Anthony Ferrugia, an analyst at A.G. Edwards.

    Other analysts see the deal as a cost-saving move for Alltel.

    "We believe Alltel wireless properties in Iowa and Aliant's Nebraska wireless properties could be integrated, bringing cost savings and roaming efficiencies to the combined entity," Merrill Lynch analyst Daniel Reingold wrote in a report today.

    A different approach
    The changing telecommunications industry has seen a slew of new companies race to build high-speed fiber-optic networks in large markets such as New York, Los Angeles, and Washington. Although many communications companies eschew smaller markets for fear of weak return on investments, Alltel--which prides itself on customer service--shines in smaller communities.

    "Our strategy has been [to acquire] rural telephone companies," Alltel spokesman George Smith said. "We know how to work that business. We understand the dynamics of the smaller communities."

    "Our whole history is built on acquisitions," he added.

    Communications giants GTE, Sprint, and BellSouth also started in smaller metropolitan areas, A.G. Edwards's Ferrugia noted.

    Alltel sees an advantage in steering clear of the largest metropolitan markets.

    "Some CLECs [competitive local exchange carriers] are building out in major markets, but others are not. It just depends on what your strategy is," Ferrugia said. "Some people prefer second-tier markets because competition doesn't come as fast and isn't as heavy."

    Edward Jones telecommunications analyst Mel Marten said, "All these exciting new companies like Qwest and Level 3 are not going to be building competitive phone service in the middle of Nebraska any time soon."

    Philip Wohl, a telecommunications analyst with S&P Equity Group, echoed Marten's comments. "They're not going to be world-beaters or have double-digit growth, but they're going to be one of the top players in their area because people will leave them alone," he said.

    Bundling services
    Alltel, with 5.6 million customers in 22 states, is one of the larger independent local telephone companies. As a non-Baby Bell, the company is free to offer in-region long distance services to its customers, and has been doing so for about two years.

    Alltel bought wireless provider 360 Communications in March, which contributed significantly to the company's mobile services offerings, analysts said.

    Wireless services are one of Alltel's fastest-growing businesses and accounts for about one-third of its revenue, Edward Jones's Marten said.

    The Aliant deal, which includes wireless service in 20 Nebraska counties, also allows Alltel to sell bundled services in that region.

    What is Alltel?
    The company, created by the 1983 merger of Allied Telephone and Mid-Continent Telephone, may serve small markets, but it is no small-time player.

    The Fortune 500 company, with 21,000 employees worldwide, reported revenue for 1997 of $4.2 billion on a pro forma basis.

    Roughly two-thirds of the company's revenue comes from its telecommunications business and one-third comes from its banking software and financial information services business, Smith said.

    In the third quarter ended September 30, Alltel earned $157.4 million, or 57 cents per share, excluding one-time items, compared to $128.4 million, or 46 cents per share, for the same period a year ago. Quarterly revenue rose to $1.3 billion from $1.1 billion a year ago.

    Alltel's largest markets include Las Vegas, Nevada; Charleston, South Carolina; Richmond, Virginia; and Jacksonville, Florida. The company also provides phone service in the Philippines, and is working on a $200 million plan to offer wireless local loop connections in India.

    Shares closed more than 3 percent higher today at 57.625, a new 52-week high for the stock. Alltel's stock is up sharply since August, when shares hovered around the low 40s. Shares have traded as low as 38.25 in the past 52 weeks.