Alltel to acquire Western Wireless for $6 billion; plans to refinance Western debt with cash on hand

By Paul Deckelman

New York, Jan. 10 - The waiting is over: Western Wireless Corp., whose bonds firmed smartly late last week on market speculation that the Bellevue, Wash.-based rural cellular service provider was in talks to be acquired by larger rural provider Alltel Corp., officially announced Monday that it would, indeed be bought by Little Rock, Ark.-based Alltel in a stock-and-cash deal totaling some $6 billion, including the assumption by Alltel of about $2 billion in outstanding Western Wireless debt.

On a morning conference call with analysts, Alltel's chief financial officer, Jeffrey Gardiner, said that the company "is planning to refinance most of the Western Wireless debt at the close" of the merger transaction in expectation of reaping about $70 million of annual interest savings, given the disparity between the credit profiles of the two companies. Closing is expected to occur around mid-year.

Moody's Investors Service currently rates Western Wireless' senior debt at B2 and its 9¼% senior notes due 2013 at Caa1, while Alltel's senior unsecured debt is rated A2; Standard & Poor's gives Western Wireless a B- corporate credit rating and a CCC rating for its bonds, while giving an A rating to Alltel.

According to Western Wireless' most recent 10-Q filing with the Securities and Exchange commission, as of the end of the third quarter on Sept. 30, it showed long-term debt, less the current portion, of $2.092 billion, including $600 million principal amount of 9¼% senior notes due 2013 and $115 million principal amount of 4 5/8% convertible subordinated notes due 2023, in addition to nearly $1.192 billion of credit facility debt.

On a follow-up conference call later Monday with members of the media, Gardiner would neither confirm nor deny for Prospect News whether Alltel specifically intends to redeem those securities as part of any refinancing - but he did allow that "when you look at the opportunities to refinance the entire roughly $2 billion, that's what we were referring to when we said the potential interest savings was in the $70 million range.

"So we'd prefer not to talk about specific securities, but wanted to give investors a feeling for the opportunities there and will study that security along with the other opportunities over the next six months."

Gardiner further said that the vast bulk of the funds for refinancing Western Wireless' debt would come from Alltel's own available cash, eliminating the need to issue new debt to fund the takeout. He noted that his company has "a large amount of cash on the balance sheet today," over $500 million, and it expects to receive about another $1.4 billion in May related to an equity unit offering. Any remaining amounts, the CFO said, would be funded out of its existing $1.5 billion credit facility, which has no borrowings currently outstanding.

Gardiner, in answer to another question, indicated that the credit line would also be sufficient to finance the $1 billion cash component of Alltel's offer for Western Wireless.

Under the terms announced Monday Alltel is offering to exchange 0.535 shares of its own stock plus $9.25 in cash for each outstanding share of Western Wireless common stock. Western Wireless shareholders will have the ability to make an all-stock or all-cash election, subject to pro ration. All told, Alltel will issue approximately 60 million new shares of stock and pay $1 billion in cash. Including Western Wireless' cash reserves, Alltel estimated its intended acquisition's net debt at about $1.5 billion.

Fifth largest wireless company

The planned combination of the two companies will create the fifth largest wireless provider in the United States after industry leader Cingular Wireless, its close competitor Verizon Wireless, the new entity that will emerge from the pending combination of Sprint Wireless and Nextel Communications Inc., and T-Mobile USA. The expanded Alltel will serve 10 million wireless customers in 33 states - mostly in rural areas in the Midwest and the western portions of the country comprising over 1 million square miles, the largest physical network of any wireless carrier in the country.

Alltel says its merger will also create the leading regional roaming partner for each of the four national carriers, who have chosen to avoid the enormous expense of building out their networks in the vast, sparsely populated rural regions of the country by instead following the more economical alternative of allowing their customers wishing to use their cellphones when traveling in those areas to roam with rural providers like Alltel and Western Wireless, among others. Such roaming revenues will account for about 10% of the combined company's revenues.

Alltel currently also offers conventional wireline telephone service in its rural territory, although this sector has declined in importance as a revenue generator relative to the growing wireless service over the past several years. Alltel's president and chief executive officer, Scott Ford, told the analysts on the conference call that it would look at the possibility of spinning that service off - the same thing Sprint is planning to do with its incumbent local exchange carrier service as part of its merger with Nextel. If that were to happen, some of the combined company's debt would likely go with the LEC upon its spin-off; Ford declared that his company has been "very pleased with the valuations placed [by the financial markets] on rural LECs. We think that some of the debt load that we might be able to look at putting on our LEC is very sustainable by that ILEC property," although he said that the idea would be more fully explored over the next 12 months before a decision is made.

Western a "spectacular" business

Western Wireless' chairman and chief executive officer, John Stanton, recounted on the conference call that when the telecommunications industry seemed to be imploding back around 2001, "the market believed that all telecom businesses were going to go the way of WorldCom. We, because of the level of debt we had, clearly got put in a difficult position."

However, he said that "we knew we had a terrific business throughout that. My wife and I bought a lot of stock personally because we believed in the opportunity. There was never any doubt in my mind that we were not only going to work through it, but that we had a spectacular good business."

Stanton noted that after Western Wireless chose to expand its international operations - which Alltel will now inherit - by taking over the license to run Austria's money-losing cellular business from Vodafone plc for free - "our stock reacted very poorly. We went from $5 to $1.43."

Western Wireless also issued new stock twice in the last two years, he said, "because we did recognize that although we were never going to get to an 'A' credit, we recognized that the strength of balance sheet really equated to the ability to execute on opportunities. So we were strengthening our balance sheet one step at a time."

Speaking of the planned merger transaction, Stanton asserted: "I guess this is the ultimate strengthening of our balance sheet."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.