Alltel To Take Over Western Wireless in $4.4 Billion Deal

Telephone service provider Alltel has finalized a deal to buy fellow niche carrier Western Wireless (Nasdaq: WWCA) for US$4.4 billion in cash and stock as the merger activity in the wireless field moves into the regional space.

As part of the deal, Alltel will take on about $1.5 billion in debt that Western Wireless is carrying on its books, boosting the total value of the deal closer to $6 billion.

The move will give Alltel enough subscribers to move it into fifth place nationally, with about 10 million subscribers in 33 states. That still only gives it about a third of the size in terms of subscribers of giants such as the newly merged Cingular/AT&T and Sprint/Nextel.

Regional Service

However, Alltel indicated its goal is not to go head to head with the giants in the industry but rather to focus on its strength as a regional provider.

That, in turn, could give Alltel added clout as it negotiates roaming agreements with the larger companies, who want to give their customers the ability to roam into rural and remote areas that are beyond the range of their mainly metropolitan networks.

Alltel CEO Scott Ford said the move enables the company to devote more resources to its mobile business, which will make up 70 percent of Alltel's revenue post-merger. Wireless has long been the fastest growing portion of the Alltel business, which also includes land-based local and long-distance calling in some southern states.

The merger will "create additional wireless scale and scope in attractive and complementary markets," Ford explained.

"The wireless industry is gravitating swiftly to a smaller number of large national and regional players," added John W. Stanton, chairman and CEO of Western Wireless. "We believe that combining forces is in the best interests of our shareholders, customers and employees."

All Mergers, Great and Small

The spate of mergers is just one reason why analysts have singled out the wireless industry and many of its players as a sector to watch in 2005. The consolidation provides scale that can be transformed into increased profitability at the same time that the technological foundation is being laid to expand wireless well beyond voice services to data transmission, streaming media and other forms of mobile commerce.

Ironically, merging with Western might make Alltel more likely to be bought itself, Merrill Lynch (NYSE: MER) analyst David Janazzo said. Janazzo said in a research note that other carriers could greatly expand their footprint by buying the combined firm. Such a move would likely be more likely to draw the scrutiny of regulators, however, Janazzo noted, as it would further reduce consumer choice.

Other analysts see the Alltel buy as the leading edge of what could be another burst of consolidation, this time focusing on smaller carriers with limited regional coverage in more far-flung areas.

"These companies are attractive because they can provide growth and profits if managed well," Gartner (NYSE: IT) analyst Tole Hart said. "If you believe the argument that scale is necessary, you can see how you might end up with some very large but spread out regional mobile giants."

Phone Home While You Roam

The Western deal is seen by many as a way for Alltel to beef up its position in negotiating roaming deals, moving it into a number of states in the West where it previously had no presence, including California, Idaho, Minnesota, Montana, Nevada, North Dakota, South Dakota, Utah and Wyoming. It also gets expanded coverage in Arizona, Colorado, New Mexico and Texas.

Analysts say that while the deal is partly about scale, the leverage gained in being able to negotiate roaming deals might be just as important. Major carriers such as Verizon and Sprint (NYSE: S) have traditionally focused on building network coverage around major urban areas, leaving large swaths of the country where coverage is thin.

In those areas, national carriers often have agreements in place to enable their customers to move seamlessly onto regional networks.

"Having the ability to roam and have coverage anywhere you might go is increasingly important to customers, particularly those in the business sector," Hart said.