Just when you thought Verizon (NYSE:VZ) stock couldn't go any lower, the money rumor mills believes the company is deep in talks to acquire Alltel, the nation's fifth largest wireless carrier, for roughly $27 billion, There are some reasons behind this and there is more to it than meets the eye.
Part of the mystery of all this is that Alltel was only recently taken private by TPG and Goldman Sachs Capital Partners in a $27.5 billion deal. That deal, announced in May of last year, closed in November. This isn't helping the multi-year slump of Verizon's stock (see chart below, compliment of Big Charts at Marketwatch.com (http://bigcharts.marketwatch.com)
For almost 10 years now Verizon has been on a downward trajectory that makes even patient investors swoon.
We are told that Verizon (NYSE: VZ) seems likely to pay no more than did TPG and Goldman, and will be doing so for a company that has increased its earnings before interest, taxes, depreciation and amortization (Ebitda) by 10 percent since the leveraged buyout was announced last may.
Verizon is expected to pay roughly 8 times Alltel's current Ebitda, in contrast to the 9.2 times Ebitda that TPG and Goldman paid last year when they put in roughly $4.6 billion of equity and lined up $23.8 billion of debt financing to get the deal done. Not surprisingly, Verizon hasn't made any public comments so far.
Verizon has long been looked at as the epitome of a compatible purchaser of Alltel, but it failed to bid when the company was auctioned in the spring of 2007. According to people involved in that auction, Verizon believed Alltel's valuation was too high.
Of course, that was a far different time in the credit markets, when financial buyers were routinely outbidding strategic buyers despite the cost savings and revenue synergies available to the strategic buyers. One year later, Verizon stands ready to take advantage of those cost advantages with this expected purchase. Are synergies and cost advantages what this is about?
A recent CNBC report stated that Alltel's network "... is contiguous with Verizon's own and will allow the carrier to save the roaming charges it pays Alltel."
The addition of the Alltel network is also expected to bring significant cost advantages in other areas. One of those cost advantages might have to do with the continuing threat from AT&T (NYSE:T) to take wireless customers away from VZ.
The fact that Apple's (Nasdaq:AAPL) upcoming new and improved 3G iPhone continues to give exclusivity to AT&T as the service provider might also have a bearing on Verizon's decision to go after Alltel.
