In the U.S. wireless world, the strong keep getting stronger. But is that good for consumers?
That will be a key question as Verizon Wireless seeks government approval for its $28.1 billion acquisition of Alltel from private equity investors, announced on June 5. With the addition of Alltel's 13 million customers, Verizon Wireless would jump past AT&T (T) as the nation's biggest cellular provider by a sizable margin. Together, Verizon and Alltel would have more than 80 million customers, compared with AT&T's tally of 71.4 million at the end of March.
The unexpected deal also underscores the shift of power in the mergers-and-acquisitions market, where corporations have regained prominence over the past year as the credit crisis choked off the debt financing that was so vital to the private equity boom. In fact, one of the last big deals of that boom was Alltel's takeover by TPG and GS Capital Partners, which are cashing out after less than a year for a paltry profit compared with many private equity paydays. While corporations such as Verizon have their own hard assets and cash flows to reassure lenders, private equity deals are financed by using the acquired business as collateral. Notably, Alltel's debt load had swollen to $22.2 billion from $2.7 billion as result of the private equity buyout, pushing the company's operations into the red. The banks that once freely financed such deals are under pressure to reduce their exposure to those loans.
Most analysts say the deal makes strategic sense for Verizon Wireless and that the company, owned jointly by Verizon Communications (VZ) and Vodafone (VOD), is getting a good asset at a fair price. What's more, Verizon Wireless executives promised to deliver at least $9 billion in cost savings over the first three years after the deal closes. That optimism was echoed in the stock market, where Verizon's and Vodafone's share prices each rose about 5% after the deal was announced.
Concern over Consolidation
But the deal is no slam dunk. Combining two companies of this size is always a challenge, as evidenced by the debacles seen in the merger of Sprint and Nextel. And by taking on Alltel's debt, Verizon Wireless will be more than doubling its debt load, to $38 billion. The increased interest expense could hamper the company's ability to invest aggressively in multibillion-dollar projects such as wireless network upgrades and replacing Verizon's copper phone lines with fiber-optic cables, says Ken Hyers, senior analyst at Technology Business Research.
Perhaps the biggest risk lies with government regulators. There is growing concern over consolidation in the U.S. wireless industry. Those fears were stoked earlier this year when Verizon and AT&T dominated a federal auction of especially valuable wireless spectrum, placing $16.3 billion of the nearly $20 billion in winning bids. Now, between this merger and recent word that T-Mobile's parent company may try to acquire Sprint Nextel (S), some consumer advocates are concerned that declining competition may bring higher prices and worse service. This could be especially true in Alltel's largely rural markets, which already have fewer wireless providers than major cities.
"This industry, which spends a lot of time convincing us how competitive they are, seems to be getting a lot less competitive," says Chris Murray, senior counsel with Consumers Union. And Rep. Edward Markey (D-Mass.), chairman of the House Subcommittee on Telecommunications & the Internet, issued a statement saying the proposed merger "merits the utmost scrutiny by antitrust officials and telecommunications policymakers to ensure that competition and consumers are fully protected."