NEW YORK Verizon Wireless is close to sealing a roughly $27 billion deal to buy rural mobile service provider Alltel Corp, aiming to overtake AT&T Inc (T.N) as the top U.S. wireless service, a source familiar with the talks told Reuters on Wednesday.
Verizon's move, in which it would take on about $23 billion of Alltel debt, was a surprise to many analysts as it came only seven months after Alltel was taken private by TPG Capital TPG.UL and Goldman Sachs' (GS.N) GS Capital Partners. The leveraged buyout saddled Alltel with the debt.
That $27.5 billion deal in November 2007 was the largest ever private equity investment in the U.S. wireless industry, but it closed amid a mounting credit crisis that has curtailed the leveraged buyout boom.
Stifel Nicolaus analyst Chris King said the tightness of capital markets is probably a reason why TPG and Goldman appeared open to such a quick turnaround of Alltel. "If they can break even in a far worse capital market, it certainly makes some sense for them to want to get out," he said.
TPG, Goldman, Alltel and Verizon all declined comment.
While talks were still ongoing and details yet to be worked out, an announcement could come as soon as Thursday, said the source, who spoke on condition of anonymity before a deal.
A second person briefed on the talks confirmed that Verizon and Alltel were in talks but did not have specific details.
While surprised at Verizon's move, analysts said the acquisition made sense for the No. 2 U.S. mobile service, which is 55 percent owned by Verizon Communications Inc (VZ.N) and 45 percent owned by Vodafone Group Plc (VOD.L). That ownership would not change under an Alltel deal, the first source said.
"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."
A Verizon deal would value Alltel at eight times its earnings before interest, tax, depreciation and amortization, compared with its November sale to private equity firms for about 9 times EBITDA, the source said.
Analysts said Verizon could be in a good position to refinance Alltel's debt at a lower interest rate.
Others said that a deal could also help Verizon create savings from a network and handset perspective.
For the private equity leveraged buyout, Alltel took out a $16.25 billion senior secured bank loan credit facility and a $7.75 billion senior unsecured bridge loan that were underwritten originally by Citigroup (C.N), Barclays (BARC.L), Royal Bank of Scotland (RBS.L), and Goldman.
According to Reuters LPC, loan investors say the four banks have sold off a significant portion of the $16.25 billion senior loan, but most of the $7.75 billion bridge loan remains on their balance sheets.
The Wall Street Journal said TPG has been buying the debt from banks at a significant discount and, with Goldman, would benefit from a buyer who retires that debt at par or higher.
Alltel's debt rallied as much as 10 points on the news, which was first reported by CNBC. But Verizon shares ended down 1 percent at $36.98 on the New York Stock Exchange on Wednesday.
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 ended the first quarter with about 71 million subscribers.
Verizon Wireless had been considered a natural suitor for Alltel before it was sold to private equity as Verizon Wireless and Alltel use the same CDMA wireless network technology. Sprint Nextel Corp (S.N), which has been struggling with customer losses, also uses CDMA.
Both Verizon Wireless and Sprint have roaming agreements allowing their customers to use Alltel's network in areas where they do not have coverage themselves.
Banc of America analyst David Barden estimated in a research note that Verizon represented the vast majority of Alltel's 2007 roaming revenues of about $706 million.
Analysts said U.S. antitrust authorities and telecommunications regulators at the Federal Communications Commission would look closely at a deal and could require Verizon to sell off airwaves in some markets before approval.
"I think any time Verizon tries to buy a major entity at this point, they're so big, you're likely to get a pretty rigorous review," said Paul Glenchur, an analyst with the Stanford Group.