NEW YORK (Reuters) - Verizon Wireless is in talks to buy rural mobile service provider Alltel Corp for about $27 billion in debt and cash to create a company that would overtake AT&T Inc as the No. 1 U.S. mobile service, a source familiar with the talks told Reuters on Wednesday.
While the details of the deal were still being worked out, the person, who declined to be identified, said that the $27 billion valuation could be comprised of mostly debt and a smaller amount of cash. Alltel had $23.35 billion in long-term debt on its balance sheet at the end of the first quarter.
A second person also briefed on the talks agreed Verizon was in talks to buy Alltel.
Analysts were surprised by the timing of the deal since Verizon had stood by when private equity investors bought Alltel last year, but they said it made sense for Verizon Wireless to expand through an acquisition.
"Put simply, they can run Alltel more efficiently than Alltel can," said Bernstein analyst Craig Moffett.
"It takes a strong wireless franchise, and increases Verizon's exposure to wireless which is the best business in their portfolio. It lets them exercise their advantages of scale to run the business."
The deal values Alltel at eight times its earnings before interest, tax, depreciation and amortization, compared with its November sale to private equity firms for about 9.2 times EBITDA, the first source said.
Alltel was sold to private equity firms TPG Capital and GS Capital Partners, the buyout arm of Goldman Sachs for about $25 billion on November 16. Including debt, the price was about $27.5 billion.
The ownership structure of Verizon Wireless -- 55 percent owned by Verizon Communications Inc and 45 percent owned by Vodafone Group Plc -- would not change under the deal the person said.
Verizon, shares of which fell 2 percent to $36.60 after the news, declined to comment on the matter. Alltel representatives were not immediately available for comment.
Verizon Wireless and Alltel, which had more than 13 million customers at the end of the first quarter, together would have more than 80 million customers. AT&T, currently the biggest U.S. wireless service said it ended the first quarter with about 71 million subscribers.
Paul Glenchur, an analyst with the Stanford Group, said a Verizon purchase of Alltel would likely trigger a close review from U.S. antitrust authorities and regulators at the Federal Communications Commission.
"I think anytime Verizon tries to buy a major entity at this point, they're so big, you're likely to get a pretty rigorous review," Glenchur said.