Telecoms hog Thursday headlines; analyst sees Verizon-Alltel deal facing Sirius-XM regulatory headwinds

By Paul A. Harris

St. Louis, June 5 - Verizon Communications hogged headlines on the Thursday financial pages as it announced that Verizon Wireless, an enterprise in which it partners with Vodafone Group plc will merge with Alltel Corp. in a deal worth $28.1 billion.

Analysts who spoke to Prospect News regarding the deal said that the quite a few parties stand in the winner's circle for this merger, the biggest winners being Verizon Communications, Alltel's bondholders and the investment banks that have been laboring to move hung-up LBO debt off their balance sheets.

However the deal is apt to face headwinds from regulators, according to a telecom analyst who added that if and when the merger is concluded Verizon figures to be perched atop the wireless heap with approximately 80 million subscribers to AT&T Inc.'s 70 million, leaving Sprint Nextel Corp. and T-Mobile trailing significantly in terms of market share.

Scale and scope

The analyst, who spoke to Prospect News late Thursday morning, noted that Verizon's stock at that point was up 5.7%, and said that Verizon is presently Alltel's largest customer.

"Verizon spends a fortune on roaming expense. If you're a Verizon customer based in Manhattan, and you find yourself in Montana, chances are you're on the Alltel network, and Alltel is charging Verizon $0.30 to $0.50 per minute - a fee that Verizon has no way to recoup from its 'unlimited' customers."

The analyst also said that the network business is one of scale and scope: the bigger the network the lower the marginal costs for carrying voice and data.

In addition Verizon will realize savings in capital expenditures, said the analyst. Its bigger customer base post-merger will allow Verizon to drive a harder bargain with manufacturers of equipment ranging from handsets to transmission gear.

"Those advantages flow through both the debt and the equity," the analyst said.

Closing the gap

The analyst noted that in round numbers, AT&T's market cap is $230 billion while Verizon's is $110 billion.

"In a business where scale and scope matter, and your number one competitor is twice your size, you have an inherent disadvantage," the source noted

"Verizon only owns 55% of Verizon Wireless, and they need to make wireless a bigger piece of their business.

"They need to close the gap with AT&T, and do something to improve their relationship with Vodafone [which owns the remaining 45% of Verizon Wireless].

"This acquisition more or less accomplishes those goals."

The analyst likened Verizon's acquisition of Alltel to the long distance plays that SBC Communications, Inc. and Verizon made in succession in early 2005, when Verizon acquired MCI after SBC acquired AT&T a few weeks earlier.

"Verizon didn't want MCI," the analyst insisted, "they had to have it.

"They could not allow AT&T to gain that kind of numerical, physical advantage over them.

"Acquiring Alltel is one way of attempting to close the gap with AT&T. It allows Verizon to load up their networks and get lower costs."

Not as good for Vodafone

The telecom analyst said that while the deal is good for Verizon it is much less so for Vodafone.

"Verizon Wireless generates $11 billion to $12 billion of cash flow per year, and does not pay a dividend," said the analyst.

"Verizon does not want it to pay a dividend, and has never wanted it to pay a dividend.

"Vodafone would love to get a dividend because they would like to monetize their investment.

"This acquisition basically insures that there will be no dividend flowing out of Verizon Wireless for at least another three years."

Deal risk

The telecom analyst asserted that while there is no realistic counterbidder, Verizon's play to acquire Alltel comes with a fair amount of deal risk.

"The FCC is apt to be very unhappy with this deal," the source contended.

"The FCC, the Department of Justice and the Department of Commerce like competition, which they believe benefits the American consumer.

"The acquisition of Alltel by Verizon pushes us more towards a duopoly."

The analyst said that the government's March spectrum auction would likely serve to further sour regulators' appetites for the merger.

"The government attempted to stack the deck with rules and caveats designed to help the 'small guy,' but it didn't work," the source said.

"Verizon and AT&T threw $15 billion at the government and acquired virtually all of the spectrum."

"In my opinion the FCC will be hard pressed to deny this deal. But look how long it has taken them to approve the Sirius-XM deal.

"Basically Verizon has until Jan. 20 to get this deal through before a likely new FCC emerges. And who knows what McCain or Obama will do?

"The FCC is not going to be thrilled with this. The question is, will [chairman] Kevin Martin push hard to get it done under his watch, or will he postpone, and push it over to the next commission."

On the day

Trailing their morning rally, shares of Verizon (NYSE: VZ) eased during the afternoon, closing at $37.41, up 1.16%, or $0.43, on the day.

Vodafone (LSE: VOD) shares gained 3.75% on Thursday, ending at £160.45 per share, £5.80 higher.

Shares of AT&T (NYSE: T) ended the session 2.73%, or $1.05, higher, and closed at $39.55.

Shares of Sprint Nextel (NYSE: S), the third-largest wireless operator, fell fractionally, 0.11%, to close at $9.24, down a penny.

Shares of Deutsche Telekom AG, owner of the number four wireless network, T-Mobile, gained 0.91%, or €0.15 per share, to close at €16.63.

The telecom analyst commented that the merger of Verizon and Alltel - the number five wireless until the merger goes through - presents Sprint and T-Mobile with very serious problems of scale and scope, going forward.

Nor was the Verizon-Alltel deal the only merger news from the telecom sector on the day.

The analyst noted that France Telecom SA announced that it was planning a $42 billion bid to acquire Sweden's TeliaSonera which would create Europe's largest telecommunications company.

TeliaSonera reportedly rejected that offer later in the day.

Shares of France Telecom (NYSE: FTE) finished the Thursday session down 3.05%, or $0.91, at $28.91.

XM-Sirius troubles continue

The merger which the telecom analyst mentioned in the context of regulatory headwinds, the

XM Satellite Radio Holdings Inc. - Sirius Satellite Radio Inc. deal, continues to generate news, according to a special situations equities analyst who said that Connecticut attorney general Richard Blumenthal, along with staff members from the attorneys general offices of seven other states, had a conference call with FCC chairman Kevin Martin on Tuesday to express disapproval of having one company control the entire satellite radio spectrum.

On the same day, the Consumer Coalition for Competition in Satellite Radio met with the FCC's legal advisor on media issues to say that the "highly confidential documents" filed by Sirius on April 10 should be reviewed in a hearing. The coalition says that an exploration of the documents would likely uncover evidence of antitrust violations.

XM shares (Nasdaq: XMSR) rose 0.78%, or $0.09, to close at $11.61.

Sirius shares (Nasdaq: SIRI) were up 1.5%, or $0.04, to close at $2.70.

Thursday's situations took place against a backdrop of rallying share prices, as all three major U.S. indexes posted advances of greater than 1.7%.

The S&P 500 rallied the most, 1.95%, to close at 1,404.05, up 26.85 points.

The Nasdaq climbed 1.87%, or 46.8 points, to close at 2,549.94.

The Dow finished 1.73%, or 213.97 points, higher at 12,604.45.

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