The deal, which is reported to be valued at $28Billion certainly isn't a drop
in the bucket for Verizon (VZ), but it does show just how
aggressive the mobile space will be in the years to come. With an estimated
3Billion people with mobile phones worldwide, the subscriber growth curve is
certainly getting to its last legs, if it isn't already there.
To
paraphrase the famous Narcotics Trafficker, Stringer Bell, from the wonderful
David Simon created HBO drama The Wire.
"That guy we got down at
the pit working for us, now he's got the one cell phone I gave him for re-ups,
and he's got another cell phone only for when the girl calls, now if a low level
guy like that can have 2 cell phones, how you gonna sell any more phones? That's
market saturation right there"
The above was obviously cleaned up and
paraphrased, as HBO is well known for cutting edge programming and not being shy
when it comes to expletives. The point is still very valid. Not every customer
in the country is going to have multiple cellular phone accounts, so saturation
is a big concern for Verizon and its competitors AT&T (T) and Sprint (S). So with subscriber gains
mainly coming out of the pockets of other carriers the way to increase the top
line is to purchase smaller regional carriers, or have the breakthrough product
that most users will want and will need to have.
A lot has already been
written about Verizon's unwillingness to work with Apple (AAPL) and secure the iPhone
rights, essentially handing the break-through device to rival AT&T. More
recently however, the company has been on the soapbox about going open with its
mobile phones, even including the possibility of using Google's (GOOG) Open Source Android
mobile platform on some phones. As customers in the US grow, with regards to
their mobile phone usage and feature expectation it'll be up to the carrier to
foster an environment of functionality, ease of use, and customizability. With
the industry headed in that direction, the playing field should be
level.
So when Americans emerge in a future where cell phones will be
open, customizable and feature-plentiful on a seemingly level playing field, how
does a carrier win? It's simple, have a bigger stick than the other guy! And in
the world of mobile phones, that means more subscribers on better, faster
networks. Verizon's got the network part down, but was playing second fiddle to
AT&T when it came to US subscribers. With this deal, not any more. Combining
Alltel's base with Verizon's will make VZ the biggest carrier in the US, couple
that with it's recent win in the 700Mhz Spectrum auction and Verizon is looking
to secure the face of the Wireless Nation for the next 10 years.
Alltel
was taken private just last May at a price tag of roughly $27.5Billion on a
combination of debt, equity and a tremendous amount of leverage. It seems the
private equity partners, TPG and Goldman Sachs Capital Partners, were looking to
make a quick buck here and get out while they could with even the slightest of
profit, even though at current levels Verizon would be paying a reported 8 times
earnings, while last year's private deal fetched 9.2 times.
While the
price tag will be debated Verizon can certainly justify the purchase as it
builds for its future with as many subscribers as it can. And on top of that, it
now has a whole new database of addresses to send letters to recommending an
upgrade of existing Internet and Television connections to Verizon's high speed
FiOS, the fiber optic solution VZ has spent tons of time and even more money
rolling out across the country.
