Alltel $1.25 billion mandatory, about 5% cheap, seen attracting outright buyers

By Ronda Fears

Nashville, Tenn., April 30 - Alltel Corp.'s $1.25 billion mandatory convertible is about 5% cheap at the midpoint of price talk, which is an average pricing level, Bear Stearns & Co. convertible analysts John Wright and Matthew Hempel said in a report Tuesday. They expect strong demand, particularly from outright buyers, due to the high yield from an investment-grade name.

The analysts use a credit spread of 300 basis points for the issue, which is expected to be rated A2/A, and 20% to 22% volatility in the underlying stock. That puts it 4.88% cheap at the midpoint of price talk, which puts the yield at 7.75% to 8.25% and the initial conversion premium between 18% and 22%.

S&P has a negative outlook on its A rating for the issue, the analysts noted, adding that S&P said there is a strong downgrade possibility if Alltel does achieve a total debt to EBITDA level of less than 2 times by 2003.

Bear Stearns equity analyst Robert Fagin has a buy rating on the stock and in a report last week said Alltel's financial position remains solid.

"Even considering the anticipated financing requirements for the $1.65 billion acquisition of CenturyTel's wireless properties and $1.9 billion purchase of Verizon's access lines in Kentucky, we expect Alltel will remain on firm financial ground, owing to strong cash flows driven by very profitable wireline and wireless businesses," Fagin said in a report Friday.

In the first quarter, Alltel generated over $300 million in free cash flow and has $3.59 billion in net debt with $5.68 billion in equity on its balance sheet. Those statistics, Fagin said, reflect a solid cash position and ability to generate consistent cash flows in the midst of a tough economy.

The convertible analysts noted that Alltel's current stock dividend yield of 2.79% and 4.6% stock dividend growth rate over the past five years will bring down the valuation.

"Alltel has a similar rating and credit stats as the Ameren mandatory which came out a few months ago and priced at the wides (9.75% up 18%)," the Bear Stearns convertible analysts said.

"The pricing terms for this deal seem par for the course for a mandatory and should be able to clear the market without a problem. We should also see substantial interest in the issue from outright buyers who are attracted to the high yield on an investment grade issuer."

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