Verizon: acquisitions in global translation: behind the face value

Internet News recorded that Verizon acquired Alltel equity and debt in a transaction worth $28.1bn with the transaction between itself and it’s minority owners Vodafone and Alltel.

Verizon will purchase Alltel from TPG Capital and GS Capital Partners, for about $5.9bn in cash and assume Alltel’s debt, which is estimated to be $22.2b making the total transaction value $28.1bn. The deal is expected to close by the end of the year, pending regulatory approvals.

 Alltel was always a potential buy-out candidate for Verizon because they used the same network technology Together, Verizon Wireless and Alltel will have 80.2m , overtaking AT&T’s 71.4m customer base.

Verizon Wireless and Alltel both use CDMA, which will make integrating the two companies’ networks easier, and more efficient. (AT&T commented on the smooth merger with  Cingular thanks to sharing common GSM technology where the Sprint and Nextel Communications failed by not sharing a common technology.

Verizon said once the deal closes, customers at both companies will have access to more products and services and it expects to expand the in-network calling to the combined customer base, which will reach about 80m offering Alltel customers advanced services, such as over-the-air downloadable music and a nationwide network since today Alltel only operates in 57 primarily rural markets. Alltel will also join Verizon’s 4th generation path to LTE, and participate in its Open Development Initiative.

Canadian take
The Canadian take on the story is that Bridgewater Systems has scored a key $30m  contract with Verizon Wireless, the U.S. giant, and the stock is soaring.
The Kanata company said yesterday that it will supply managed subscriber data and service control solutions over a three-year contract to Verizon, which will become the biggest U.S. carrier with its $28.1-billion purchase of Alltel.

CEO  Ed Ogonek said Bridgewater will be sole supplier of the technology. "This deal is very significant because it is our first customer for a new integrated software and hardware offering (provided by an undisclosed computer maker). It makes a small Canadian company a major supplier to Verizon."

The deal follows news  that Sprint will use Bridgewater software to manage a new U.S. WiMAX broadband network. Bridgewater shares have almost doubled in less than two weeks, closing at $3.96 yesterday.

A Vodophone angle
Forbes ran with the fact that one of Vodafone Group PLC's largest shareholders and one of its most vociferous critics who stopped short of endorsing Verizon Wireless's $28bn buy of rural mobile service provider Alltel, said reaction to the deal clearly showed US investor confidence.
Karen Robertson, investment director at Standard Life Investments,  the company's fourth biggest shareholder, said 'the bears will still complain there is no cash flow - however, the fact the Verizon share price is up 6% is a big vote of confidence in the deal from US investors.'

Her comments are more conciliatory than in 2006 when the investor called for Vodafone to sell its 45% stake in Verizon Wireless to majority owner Verizon Communications.  But it  stopped short of an endorsement of the deal which will 'significantly' enhance the value of Vodafone's stake but will also delay the payment of a dividend by another few years,' the absence of which has caused friction with some investors.

The money  blog approach
Under Thursday’s $28.1bn deal between Verizon Wireless and the owners of Alltel, a group of investment banks agreed to immediately sell $5bn of their unsold bridge debt to Verizon at a discounted price of 93 or 96 cents on the dollar. (There are two prices because the bridge debt was to have rolled into two types of junk bonds, one that pays interest in cash and one with the option to pay interest in kind)

Conspicuously absent from the group of bank sellers was Barclays, which plans to hold on to its $1.5 bn share of the $7.7bn bridge debt till the Alltel sale is completed later this year. At that time, the British-based bank expects the debt to be retired at its full value. According to people familiar with the matter, Barclays hadn’t marked down the value of the bridge debt on its books, so it didn’t wish to sell it right now and recognise a loss.

The banks who are unloading their shares of the bridge loan are Citigroup, Goldman Sachs and Royal Bank of Scotland. They have mostly written down that loan to below 90 cents on the dollar. As such, selling the debt to Verizon helps the banks book some profits in the current period.

And if for some reason the merger falls apart later on, these banks wouldn’t be stuck holding the risky Alltel junk bonds. A small amount of Alltel bonds that were sold to investors last November traded at 81 cents prior to the deal and are now at 98 cents, according to data from Reuters Loan Pricing Corp.

The discounted bridge loan sale was a key factor in Verizon’s purchase of Alltel because the loan hadn’t yet rolled into junk bonds, a development that was originally scheduled to take place in the next few weeks.

Unlike bank loans and leveraged loans which can be retired at the option of the issuer at par or close to their par value, the bonds would have had terms that prevented them from being called for several years. Had the bonds been issued, Verizon would have had to pay roughly 120 cents on the dollar to retire them, according to a person familiar with the deal. That would likely have been a deal breaker.

Sources: http://www.internetnews.com/
http://www.canada.com/ottawacitizen/news/bustech
http://www.forbes.com/
http://blogs.wsj.com/deals/