Verizon-Alltel deal seen as positive

Verizon Wireless’ proposed acquisition of Alltel is good news for both sides, industry analysts say, but not necessarily for equipment vendors supplying the CDMA gear that both use. And while Verizon appears to be paying a premium, there are other longer-term benefits to this acquisition.

Craig Moffett, analyst with Sanford C. Bernstein, pointed out in his analysis today that Verizon has the scale “to run Alltel cheaper than Alltel can run Alltel.” The price reported by CNBC and others of $27 billion values Alltel subscribers at about $2000 each, Moffett said, which is slightly more than the $1800 per sub that Cingular paid for AT&T Wireless and the $1900 per sub that Sprint paid for Nextel. And while today’s higher industry margins might make the case for the higher per-subscriber valuations, Moffett said, “to the extent that future subscriber growth prospects today are lower, as they almost certainly are,” he would expect per-subscriber valuations to be lower. “On this basis, the deal looks somewhat rich relative to warranted valuations,” Moffett concluded.

But there are other longer-term benefits for Verizon, Moffett added, including increased investment in what is the most profitable part of its business. Even longer-term, acquiring Alltel could benefit Verizon in its acquisition of 100% of Verizon Wireless from Vodafone, Moffett argues.

“Verizon's partnership agreement with [Vodafone] gives the company unilateral rights to make deals of this size,” since the deal isn’t international and doesn’t represent more than 20% of Verizon Wireless' equity,” Moffett said. “Assuming the deal is financed inside [Verizon Wireless], it would further defer the payment of dividends to Vodafone and could therefore potentially increase the pressure on Vodafone management from Vodafone shareholders to reach a resolution of their long-standing partnership. We believe Verizon, and its shareholders, would welcome a buy-in of Vodfone's 45% stake, assuming the price paid was reasonable, as it would further [dramatically] increase Verizon's wireless exposure.”

Moffett and other analysts including Jeff Kagan of Kagan Telecommunications said the acquisition is also a signal that regional stand-alone wireless companies are likely to become endangered species in another round of possible wireless industry consolidation.

Both Verizon and Alltel operate CDMA networks, which will make integration easier and generate capital-spending synergies, which, when combined with roaming benefits, could generate long-term savings of $1 billion in operations expense, Moffett said.

Traditionally, deals such as this one have a negative impact on equipment vendors to both companies, but Matt Thornton, telecommunications equipment analyst at Avian Securities, sees that impact as “fairly immaterial given Alltel’s relatively small market share.” Near-term, however, it would be a “modest near-term negative” for CDMA infrastructure vendors such as Alcatel-Lucent, Nortel Networks and Motorola as the two companies slow spending while going through typical merger-related inventory and investment rationalization, Thornton said.

“On the handset side, we believe LG and Nokia could be very modest beneficiaries of a combination,” Thornton wrote in a research note. “LG would benefit, as its dominant presence at Verizon would likely extend to Alltel’s footprint where LG’s share is much less.”