Alltel's private party
Alltel is going private for a whopping $27.5 billion, the very first major wireless service provider in the U.S. to be ensnared in the private equity deals sweeping Wall Street. There may be more on the horizon.
According to analysts, Alltel may just be the first among Tier 2 regional providers-and possibly even nationwide operators — to become a target for leveraged buyouts. The huge cashflow of many operators presents an attractive target to private equity firms like the Blackstone Group and Providence Equity Partners that bid on Alltel, but ultimately lost out to the private equity arm of Goldman Sachs and TPG Capital.
More deals could be in the offing, but some investors are wondering what Alltel can now do as a private company that it couldn't do as a public one.
Goldman Sachs and TPG agreed to pay $71.50 per share for the country's fifth-largest wireless operator, which has a subscriber base that just a few years ago would have ranked among the Tier 1 operators. Only $4.6 billion of the $27.8 billion price is in cash from TPG. The rest will come from $15.5 billion in loans and $7.7 billion in junk bonds, increasing the company's debt exponentially.
Alltel isn't the first telecom company to see its public equity swapped for debt. LogicaCMG sold its telecom group to private investors in February, and shortly after Alltel's decision, Avaya struck a deal with TPG and Silver Lake. But those are both vendors. Alltel's position as a major wireless provider makes it unique.
Leveraged buyouts are short-term deals, said Ranjan Mishra, director for strategic consulting firm Oliver Wyman, formerly Mercer Management Consulting. A private equity firm takes a company private using its access to ready cash and its shelter from the quarterly expectations of the stock market to overhaul the company, he said.
That overhaul can take place in several ways: The new owners may seek to cut costs and restructure the company operationally or it may invest new capital into the company, allowing it to expand and grow without causing a shareholder revolt.
Ultimately the goal would be to increase the intrinsic value of the company so at some future point it can be sold or spun off at a profit, Mishra said. In the case of Alltel, Goldman Sachs and TPG's strategy isn't clear. Alltel isn't known for being a mismanaged company, Mishra said, but then again, the wireless industry hasn't been subjected to the discipline that many other mature industries have been forced to adopt. Wireless is coming off its boom years, which led to mass adoption of cellular communications since the late '90s. The U.S. hasn't reached the high penetration levels of some of its European and Asian counterparts, but more than two-thirds of the U.S. population uses a cell phone. Still, the days of growth at all costs are over.
“The wireless industry is not known for producing the most efficiently run companies,” Mishra said. “We're past the growth stage. There's still some margin to grow out there, but the focus is shifting.”
The new owners could be looking to streamline Alltel, maximizing its efficiency and profits and returning a meaner, leaner company to the market, Mishra said. The other option is to invest more money into Alltel and allow it to grow. This scenario can be an optimal situation for a company looking to expand. As a publicly traded company, Alltel answered to many masters, and as evidenced by Sprint's recent trouble with its investors, those master's aren't always keen on multi-billion-dollar capital outlays. As a private company, though, Mishra said, the ownership and management share the same vision as Alltel, allowing it to incur short-term losses for the sake of long-term growth.
“This opens up the possibilities for Alltel,” Mishra said. “Alltel is accustomed to being rewarded by the ‘street quarter’ compared to the previous year's quarter for growing revenues and earnings and not capital spending.”
If Alltel's private investor's choose to grow the company, the question will be: Where will they expand? TPG and Goldman Sachs may have national ambitions. Before the mergers and acquisitions of the last two years, the market supported six nationwide carriers. Alltel may be thinking the market could easily support a fifth today, Mishra said. The company could begin expanding beyond its core rural markets and into larger cities, taking a cue from other Tier 2 carriers such as Leap Wireless, MetroPCS and U.S. Cellular, which have either been expanding to top-tier markets or targeted them originally. To do so would require both massive outlays of cash for infrastructure as well as new spectrum acquisition. So far, Alltel hasn't shown much interest in this type of expansion. It didn't participate in the Advanced Wireless Services auction last year, but it could opt to bid in the upcoming 700 MHz auction.
A more likely scenario would be for the company to once again tap into the skills of its investors, said John Celentano, president of Skyline Marketing Group. The private equity groups are deal-makers, and there are plenty of deals out there left to be made. There's no rule against those deals being made by TPG and Goldman Sachs instead of another equity group. A leveraged buyout of U.S. Cellular and subsequent merger with Alltel would greatly expand Alltel's footprint as well as move the Alltel brand into a top-five market like Chicago. Or, a similar deal with MetroPCS would put Alltel on track to move into some of the largest metropolitan markets in the U.S.
“It would surprise me to see that, after this deal closes, they start buying up other companies,” Celentano said. To him, expansion makes much more sense than reorganization if TPG and Goldman Sachs are planning to increase the value of the company.
Although many of the leveraged buyouts in other industries are focused on cost cutting, there is only so much cost cutting a wireless operator can do to remain competitive. Alltel's capital expenditures aren't as high as its Tier 1 counterparts, but Celentano estimates it will spend $1.2 billion this year to maintain its network and build out in current markets. Lopping that capex budget off at the feet simply isn't an option.
“Wireless operators have to spend some hefty dollars just to stay in business,” Celentano said. “These companies don't have room to scale back. I'm not privy to the ultimate plan for Alltel, but if it expects to keep its momentum, it has to either maintain its spending or grow it.”
Regardless of which direction private ownership takes Alltel, that the deal was made at all is a good sign for the wireless industry. The U.S. wireless market may be slowing, but private equity's interest in mobile operators shows there are still incremental growth opportunities in the industry.
“The trend will continue,” Mishra said. “There might very well be a dampening of interest if it's decided that some of these deals may have overreached. Turning around a telecom company may be harder than they thought. But unless that happens, expect more of these deals in the future.”
|Carrier||Capex 2006||2007||% change|
|Source: Skyline Marketing Group|
|Source: Skyline Marketing Group|
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