MOBILE WIRELESS DEALS: Alltel/ Rural Cellular/ Verizon Wireless Divestiture Markets

AT&T Closes on $2.35B Wireless Buy

AT&T (NYSE:T, “AT&T”) announced June 22, 2010 that it has completed its acquisition of wireless assets covering 79 markets across 18 states, from Verizon Wireless (NYSE:VZ, “VzW”). The $2.35b transaction, which was announced in May 2009, includes an estimated 8m POPs and approximately 1.6m subscribers, up from 1.5m when the deal was announced.  VzW had been required by the FCC and Justice Department to divest the markets in conjunction with its 2009 acquisition of Alltel. 

“Mobile broadband is changing how we live our lives and transforming every sector of business, and AT&T is leading the way,” said Ralph de la Vega, president and ceo of AT&T Mobility and Consumer Markets. “We’re excited that with this acquisition, AT&T will bring the benefits of mobile broadband to new subscribers. We mobilize everything for our customers by delivering the best 3G experience, the fastest 3G speeds nationwide, the most popular smartphones, an array of emerging devices like eReaders and netbooks, the ability to talk and browse the Web at the same time and access to more than 225,000 apps.”

The transaction extends AT&T’s wireless network coverage in primarily rural areas of Alabama, Arizona, California, Colorado, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Dakota, South Dakota, Tennessee, Utah, Virginia and Wyoming.  When the deal was announced, AT&T said it would need $400m and 12 months following close to integrate the markets and transition them from their legacy CDMA infrastructure to GSM technology. 

Over the next 12 months, AT&T said it will launch service on a market-by-market basis as network integration work is completed. For now, there are no changes to customers’ phone numbers, rate plans, network coverage, customer service contacts or processes for making monthly bill payments. During network integration, customers will have the opportunity to select a device comparable to their existing device at no additional cost. They may also choose an upgraded handset.  Rebranding to AT&T will also occur on a market-by-market basis as service is launched.

The transaction primarily represents former Alltel assets, but it also includes assets from VzW and the former Rural Cellular Corporation.

JSICA Observations:  The deal took at least six months longer to close than the companies had anticipated when they announced it back in May 2009 (The Deal Advisor, 5/09, p.17), due presumably to FCC/ DOJ scrutiny.   Now that it’s completed, AT&T fills in some large coverage gaps out west—covering areas in North and South Dakota, Minnesota, Iowa, Wyoming and Montana where it previously had no cellular or PCS license holdings.

When the deal was announced, we estimated revenue for the markets to be just over $1b annually, and cash flow in the $375m range, implying valuation multiples of 2.2x revenue and 6.3x OIBDA. 

Assuming AT&T’s previous estimate of $400m to convert to GSM technology still holds, the total investment of $2.75b works out to 2.6x estimated revenue and 7.3x estimated cash flow.  On a per POP basis, we figure the deal came in just under $300, and using the updated 1.6m subscriber count, the price was $1,469 per sub.  When the deal was announced, we pegged the per sub value at $1,567, based on the 1.5m subs in the markets as of May 2009.