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Alltel Deal Strengthens
Hand of Verizon Wireless

Life for small cellphone carriers just got a little tougher.

Verizon Wireless finalized an agreement to buy Alltel Corp., the fifth-largest wireless carrier in the U.S., in a deal valued at $28.1 billion, including the assumption of $22.2 billion in debt. The combination helps Verizon Wireless leapfrog AT&T Inc. to be the biggest U.S. cellphone carrier with more than 80 million subscribers. Verizon Wireless, owned 55% by Verizon Communications Inc. and 45% by Vodafone Group PLC, will acquire the equity of Alltel for $5.9 billion and pay off the company's outstanding debt.

The deal, expected to close by the end of the year, further consolidates an already top-heavy marketplace. Verizon Wireless and AT&T between them will have 150 million customers, while the third- and fourth-ranked players, Sprint Nextel Corp. and Deutsche Telekom AG's T-Mobile USA, will lag far behind with 52.8 million and 30.8 million, respectively. After that, the size of the carriers drops sharply.

The smaller players will be at a disadvantage competing with the two market leaders, which will have the clout to win better terms from handset makers and sway the fees carriers charge each other to handle out-of-territory calls and transfer calls to landlines. Roaming fees are the payments carriers make to competitors to allow their customers to make calls or use data services outside their own territory.

Sprint, for instance, which has roaming agreements with Alltel, may raise with regulatory authorities concerns that Verizon could raise those roaming fees when it gains control of Alltel, a person familiar with the matter said.

The deal is likely to be closely reviewed by regulators. Rep. Edward Markey, chairman of the House Subcommittee on Telecommunications and 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."

The deal comes as growth in the cellphone market has been slowing, with the proportion of U.S. consumers owning a phone now around 80%. That slowdown, along with the prospect of a bigger rival, could put pressure on smaller players to merge. One possibility that has been floated is the combination of Sprint and T-Mobile USA, although analysts said Sprint's troubles make that unlikely. Sprint is "in the beginnings of a very long turnaround," said James Moorman, a wireless analyst at Standard & Poor's.

Analysts also noted the deal could prompt two smaller wireless carriers, MetroPCS Communications Inc. and Leap Wireless International Inc., to consider reopening past merger talks. The two companies broke off discussions last fall after differences over valuation.

Alltel's sale highlights the impact of the credit crunch. It comes just seven months after the Little Rock, Ark., carrier, which serves 13.2 million subscribers, was taken private in a $27.5 billion buyout led by TPG's TPG Capital and a unit of Goldman Sachs Group Inc.

While Alltel's performance has improved since the buyout -- the company has added subscribers and increased its margins -- the lenders on the buyout weren't able to reduce their exposure as much as they wanted. By selling to Verizon, which will retire the debt, the lenders can cut potential losses.

Verizon Wireless has had its eye on Alltel for some time, having considered bidding when the company was on the market last year. Verizon finance chief Doreen Toben said the company didn't want to bid against private-equity companies.

Alltel, whose coverage is based in the South and the Midwest, complements Verizon's existing footprint by adding numerous rural markets it wasn't previously in. "This is a perfect fit, with Alltel's high-value post-paid customer base, its solid financials, our common network technology, and significant, readily attainable synergies," said Verizon Chairman and CEO Ivan Seidenberg.

Verizon Communications' stock was up 5.4%, or $1.98, to $38.96 as of 4 p.m. New York Stock Exchange composite trading Thursday.

The deal was endorsed by Vodafone CEO Arun Sarin, who told investors on a conference call he supported the deal. He said the U.S. market remained attractive because the vast majority of the population owns cellphones and revenues for mobile Internet access and other data traffic is growing fast.

The deal could prompt investors to question the attractiveness of Vodafone retaining its stake in Verizon Wireless. Verizon Communications and Vodafone talked in recent years about a possible deal, but weren't able to agree on a price for Vodafone's stake.

Mr. Sarin has defended his decision to hold on to the Verizon Wireless stake, pointing to the rapid growth in the U.S. wireless industry in the past several years. The value of Vodafone's stake in the venture has more than doubled to as much as $75 billion, according to one person familiar with the matter. But, the value of Vodafone's stake will be affected as the U.S. market becomes increasingly saturated.

Furthermore, the deal -- by raising Verizon Wireless's debt load -- may postpone the date by which Verizon Wireless would start repaying dividends to Vodafone. Executives at Vodafone, Newbury, England, recently had said they expected Verizon Wireless to work down its debt by late 2009 or early 2010, at which point it could resume paying dividends.

On Thursday, Vodafone said it could be three years after the close of the Alltel acquisition before Verizon Wireless pays down its debt and is able to resume dividend payments.

While the deal isn't likely to face as much resistance as AT&T's $86 billion blockbuster acquisition of BellSouth in 2006, which merged two of the largest remaining landline phone companies, some officials and public-interest groups have raised concerns.

One of them, Washington, D.C.-based Public Knowledge, said in a statement, "With Sprint in a weakened condition, this deal will speed the unfortunate trend of giving consumers fewer, rather than more, choices in telecommunications services, while giving a few companies more control over the lives of consumers."

Write to Cassell Bryan-Low at cassell.bryan-low@wsj.com⁴

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